Question

Supply Club, Inc., sells a variety of paper products, office supplies, and other products used by businesses and individual consumers. During July 2018 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 2018, the company records $216,000 of revenue and awards 200,000 loyalty points. The aggregate stand-alone selling price of the purchased products is $216,000. 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.
2. During August, customers redeem loyalty points on $96,000 of merchandise. Seventy-five percent of those sales were for cash, and the remainder were credit sales. Prepare Supply Club’s journal entry to record those sales. (Do not round intermediate calculations. If no entry is required for a particular transaction/event, select "No journal entry required" in the first account field.)

Answer 1

The request is for journal entries related to sales and loyalty point redemptions in a business accounting context. In July, Supply Club must recognize revenue and set up a liability for loyalty points. In August, they record the redemption of loyalty points with adjustments in cash, receivables, and deferred revenue.

Step-by-step explanation:

The student is asking for the preparation of journal entries related to sales and a loyalty program in a business context. This involves recognizing revenue and accounting for loyalty points as a potential liability. July and August Sales Journal Entry . For July 2018, the company records $216,000 of revenue and awards 200,000 loyalty points. To account for the probability that 60% of those points would be redeemed, we calculate the potential reduction in future revenue. Each loyalty point reduces future sales by 20 cents, so we estimate potential reductions of $40,000 (200,000 points * $0.20). However, we only expect 60% to be redeemed, leading to a liability of $24,000 (60% * $40,000). For August 2018, we need to record the redemption of points on $96,000 of merchandise. The redeemed points reduce the price by 20% on the dollar, thus the actual sales revenue to be recorded would be 80% of $96,000, which is $76,800. The points redeemed should be deducted from the liability established in July.

Answer 2

July Sales and liaiblity for points program:

Cash 172,800 debit

Account Receivables 43,200 debit

Sales Revenues 216,000 credit

sales discount 24,000 debit

loyalty benefit liability 24,000 credit

August sales

loyalty benefit liability 19,200 debit

cash 76,800 debit

accounts receivables 19,200 debit

sales revenues 96,000 credit

Step-by-step explanation:

July Sales

216,000 sales revenues from which:

80% cash: 172,800

20% on account: 43,200

points issued

200,000 x 60% chance x 20 cent each = 24,000

We recognie the discount now, to match the discount with the sales which generated

August sales:

96,000 x 80% = 76,800

from which: 75% cash 57,600

and 25% account: 19,200

we decrease the liability we create in the previous entry by the 20% discounted:

96,000 - 76,800 = 19,200