1. How should the $25 Referral Credit be recorded in Runway?s Income Statement ? as a reduction of revenue or as a marketing expense? 2. When would Runway record the $25 Referral Credit? What are the entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? What are the entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer? 3. Runway is planning to adopt IFRSs in the near future. What is the relevant accounting guidance they would follow under IFRSs?
Case 13-01 Refer-a-Friend Program Runway Discount (\"Runway\" or the \"Company\") is a privately held online retailer that sells discounted high-end fashion. In an effort to increase its sales and customer base, Runway implemented a customer referral marketing campaign (the \"Refer-a-Friend Program\") whereby existing customers can refer friends to Runway and receive a $25 credit towards the purchase of future merchandise. The terms of the program are as follows: Runway offers existing customers (the \"Existing Customer\") a $25 credit (the \"$25 Referral Credit\") if the Existing Customer refers a friend (the \"New Customer\") to Runway's Web site and the New Customer purchases merchandise from Runway. After a purchase is made by the New Customer, the Existing Customer receives a $25 credit to be applied to a future purchase from Runway. The $25 Referral Credit represents the fair value of the cost Runway would pay to acquire a new customer from an unrelated third party or marketing firm who is not a purchaser of its products. The program is open to all of Runway's customers and does not need to be combined with any initial or existing purchases. Required: 1. How should the $25 Referral Credit be recorded in Runway's Income Statement as a reduction of revenue or as a marketing expense? 2. When would Runway record the $25 Referral Credit? What are the entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? What are the entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer? 3. Runway is planning to adopt IFRSs in the near future. What is the relevant accounting guidance they would follow under IFRSs? Preparing Case Analyses Unless otherwise instructed, cases and assignments may be prepared in either \"Memo\" or \"Report\" form. Memo Form If you prepare your case in Memo form, you should assume that the recipient of your memo will be your audit supervisor (audit viewpoint) or the controller of your organization (financial viewpoint.) In either case, your memo should include the following: Date: To: From: Subject: Due date of the assignment Audit Supervisor OR Controller (you must designate one) Your Name A subject for your memo. (Your subject will NOT be \"Case xyz\" or any other subject that implies a college project. Your subject should reflect your research efforts.) Body: The body should contain the following parts: Background: A brief description/summary of the problem. Problem: A statement of the problem/issue/question. Remember to address the problem/issue/question from the perspective (auditor or financial) you have chosen. Relevant Guidance: A statement listing the professional guidance used in your research. This must be cited as noted in the \"Codification\" or as noted for SEC documents. No other citation is allowed. For example, you cannot cite \"FASB xyz\" or \"SFAS xyz.\" You MUST use the cite method indicated by the FASB for codification. This section is simply a listing of the guidance used. Application: This section explains how the guidance cited relates directly or indirectly to the issue at hand. This is NOT simply copying relevant sections of the professional guidance. This IS reading the professional guidance and indicating in your own words (to the extent possible) how that guidance relates to the issue at hand. Be sure that you use your own words as much as possible. If you do not use your own words, you must enclose the material in quotes. In all cases, your MUST PROVIDE CITE REFERENCE (FASB CODIFICATION) FOR ANY PROFESSIONAL GUIDANCE USED IN YOUR MEMO.) This is true whether you summarize in your own words or quote directly. NOTE: If I cannot find your reference using the cite in your paper, then you have an invalid cite and will be graded accordingly. Conclusion: State your conclusion with respect to the case. In this section, you can state your opinion by indicating \"in my opinion\" xyz. You cannot have an opinion in this memo except in this section and only if it is clearly indicated as opinion. Of course, your conclusion will be your opinion, so you should state, for example, \"In my opinion Company XYZ should account for xyz using the guidance in xyz as follows .... In all cases, this section will explain the accounting treatment you recommend for the issue/question/problem you raise and in all cases the recommendation will be noted as your recommendation
