Question

A large clothing retailer chain, Koll’s, offers a sales incentive program where customers receive direct credit toward future purchases based upon the dollar amount of purchases today. For every $50 spent today, the customer will earn a $6 credit to be used at Koll’s in two weeks. The credit expires 5 days after it becomes active. Not all customers will redeem the credit in the 5-day window of time. Based upon historical trends, Koll’s estimates that 35% of the credits will be redeemed.

a. Determine how many performance obligations are included in a sales transaction during the sales incentive program.
AnswerOne performance obligationTwo performance obligationsThree performance obligationsFour performance obligationsNo performance obligations



b. Assuming that Koll’s sold $425,000 of merchandise (cost of $170,000) during the first day of the sales incentive period, record the journal entry(ies) to record sales revenue. Assume all sales were cash sales.
Note: Carry all decimals in calculations; round the final answer to the nearest dollar.
Transaction Standalone Total Allocated
Performance Price Selling Transaction Price
Obligations as Stated Price (rounded)
Merchandise
Customer option—merchandise credit

Account Name Debit Credit
Accounts ReceivableCashContract AssetPrepaid ExpenseCost of Goods SoldAccounts PayableDeferred RevenueInventorySales RevenueN/A
Accounts ReceivableCashContract AssetPrepaid ExpenseCost of Goods SoldAccounts PayableDeferred RevenueInventorySales RevenueN/A
Accounts ReceivableCashContract AssetPrepaid ExpenseCost of Goods SoldAccounts PayableDeferred RevenueInventorySales RevenueN/A
To record the sale of merchandise
Accounts ReceivableCashContract AssetPrepaid ExpenseCost of Goods SoldAccounts PayableDeferred RevenueInventorySales RevenueN/A
Accounts ReceivableCashContract AssetPrepaid ExpenseCost of Goods SoldAccounts PayableDeferred RevenueInventorySales RevenueN/A
To record the cost of sale of merchandise

Answer 1

This question involves determining the number of performance obligations in a retail sales incentive program and recording the sales revenue for merchandise sold during the program. The correct accounting treatment includes two performance obligations: delivery of merchandise and a future credit component. Appropriate journal entries for sales revenue and cost of sales are described in detail.

Step-by-step explanation:

The question relates to recording the sales revenue for a large clothing retailer chain's sales incentive program, which presents an accounting problem involving revenue recognition and performance obligations. There are two performance obligations involved: (1) the delivery of merchandise and (2) the merchandising credit that acts as a sales incentive. Only a portion of these credits is expected to be redeemed, which is an important consideration for the journal entries.

To calculate the credits earned, first divide the total sales by $50 to determine the number of credits. With $425,000 of merchandise sold, this equals 8,500 credits (totaling $51,000 given the $6 credit per $50 spent). Assuming 35% of these credits will be redeemed, the expected value of the redeemed credits is $17,850 ($51,000 * 35%).

Here are the journal entries to record the first day of the sales incentive period sales:

• To record the sale of merchandise:
  
  • 
    
  • Debit Cash $425,000
  • 
    
  • Credit Sales Revenue $407,150 (the transaction price minus the expected value of redeemed credits)
  • 
    
  • Credit Deferred Revenue $17,850 (expected value of redeemed credits)
• To record the cost of sale of merchandise:
  
  • 
    
  • Debit Cost of Goods Sold $170,000
  • 
    
  • Credit Inventory $170,000

Answer 2

There are two performance obligations in Koll's sales incentive program: delivering the merchandise now and providing future merchandise credit. The journal entries for a $425,000 sale include debiting Accounts Receivable and crediting Sales Revenue by $415,550 and Deferred Revenue by $9,450. Additionally, COGS is debited and Inventory is credited by $170,000 for the cost of sales.

Step-by-step explanation:

The subject of this question is related to Business, more specifically to accounting and financial reporting under a sales incentive program. Considering a sales incentive program where customers receive credits for future purchases, there are typically two performance obligations. The first obligation is the delivery of the merchandise at the point of sale, and the second is the provision of the credit that the customer earns and can use for future purchases.

Based on the provided example where Koll’s sold $425,000 worth of merchandise during the first day of the incentive period, the accounting entries would be recorded as follows, assuming a 35% redemption rate for the merchandise credits:

• Sales Revenue is recognized for the $425,000 of merchandise sold.
• Cost of Goods Sold (COGS) is recognized at the cost of sales, $170,000.
• A part of the revenue ($9,450) is deferred as it represents the value of the merchandise credits that are estimated to be redeemed (35% of $27,000 earned from $425,000 in sales at $6 for every $50 spent).

The journal entry to record the sale of merchandise would be:

Accounts Receivable: $425,000 (Debit)
Sales Revenue: $415,550 (Credit)
Deferred Revenue: $9,450 (Credit)

The journal entry to record the cost of sale of merchandise would be:

Cost of Goods Sold: $170,000 (Debit)
Inventory: $170,000 (Credit)