Supply Club, Inc., sells a variety of paper products, office supplies, and other products used by businesses and individual consumers. During July 2016 it started a loyalty program through which qualifying customers can accumulate points and redeem those points for discounts on future purchases. Redemption of a loyalty point reduces the price of one dollar of future purchases by 20% (equal to 20 cents). Customers do not earn additional loyalty points for purchases on which loyalty points are redeemed. Based on past experience, Supply Club estimates a 60% probability that any point issued will be redeemed for the discount. During July 2016, the company records $135,000 of revenue and awards 125,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $135,000. Eighty percent of sales were cash sales, and the remainder were credit sales.

Required:

1. Prepare Supply Club�s journal entry to record July and August sales. During August, customers redeem loyalty points on $60,000 of merchandise.
2.Seventy-five percent of those sales were for cash, and the remainder were credit sales.

Explanation:

1)

Dr Cash 108,000

Dr Account receivable 27,000

    Cr Sales Revenue 121,500

    Cr Deferred revenue 13,500

2)

Stand alone selling price of loyalty point = (value of loyalty point * estimated redemption) = 125,000 * 0.20 * 60% = 15,000

Total stand alone selling price = stand alone selling price purchased product + stand alone selling price of loyalty points = 135,000+15,000 = 150,000

Share percentage for purchased product = stand alone selling price purchased product/total stand alone selling price = 135,000/150,000=

=90%

Share percentage for loyalty points = stand alone selling price of loyalty point/total stand alone selling price = 15,000/150,000 = 10%

Selling price of purchased products =  transaction price * share percentage = 135,000*90% = 121,500

Selling price of loyalty points =  transaction price * share percentage = 135,000*10% = 13,500

Cash = 135,000 *80% = 108,000

Account receivable = 135,000 *20% = 27,000

Dr Cash 36,000

Dr Account receivable 12,000

Dr Deferred revenue 10,800

    Cr Sales revenue 58,800

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