Question

Vaughn Inc. has a customer loyalty program that rewards a customer with 1 customer loyalty point for every $10 of purchases. Each point is redeemable for a $3 discount on any future purchases. On July 2, 2020, customers purchase products for $340,000 (with a cost of $197,200) and earn 34,000 points redeemable for future purchases. Vaughn expects 29,000 points to be redeemed. Vaughn estimates a standalone selling price of $2.50 per point (or $85,000 total) on the basis of the likelihood of redemption. The points provide a material right to customers that they would not receive without entering into a contract. As a result, Vaughn concludes that the points are a separate performance obligation.

A . Determine the transaction price for the product and the customer loyalty points.

Product Purchases		$
Loyalty Points		$
Total Transaction Price		$

B. Prepare the journal entries to record the sale of the product and related points on July 2, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
(To record sales)
(To record cost of goods sold)

C. At the end of the first reporting period (July 31, 2020), 11,600 loyalty points are redeemed. Vaughn continues to expect 29,000 loyalty points to be redeemed in total. Determine the amount of loyalty point revenue to be recognized at July 31, 2020.

Amount of Loyalty Point Revenue

$

Answer 1

a.

	Stand alond price	% allocated	Transaction price	Allocated amount
Product purchases	340,000	80%	340,000	272000
Loyalty points	85,000	20%	340,000	68000
	425,000			340000

b.

Date	Account Titles and explanation	Debit	Credit
2 July ,2020	Cash	340,000
	Unearned sales revenue		68,000
	Sales revenue		272,000
2 July ,2020	Cost of goods sold	197,200
	Inventory		197,200

c.Revenue to be recognized = 68,000 *11,600/ 29,000= $27,200

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