Instructions

Background: Explain the background of the case and define the major accounting issues to be addressed. Ensure that you have provided enough information for a person with no knowledge of the case to understand the Company under audit, the major issues addressed in this memo, and any facts of the case that are relevant to making an informed decision.

Applicable Authoritative Literature: State the authoritative literature that you will be referencing throughout this memo.

Example: FASB Accounting Standards Codification (ASC) 405-926 Entertainment Films

Discussion of Alternatives: Detail out the various alternatives the Company has regarding the new program (i.e. marketing expense on the income statement vs. reduction of revenue). Explain the differences between these alternatives from an accounting perspective and what the authoritative literature says about these two alternatives.

Recommendation: State your recommendation for management regarding how the transaction should be recorded. Clearly state which alternative you selected (i.e. journal entry) and how you supported your decision using the authoritative guidance. Remember, there is no right or wrong answers. Rather, it is your ability to form a coherent and logical argument that determines your grade.

Case

Case 13-01 Refer-a-Friend Program

Runway Discount ("Runway" or the "Company") is a privately held online retailer that sells discounted high-end fashions. 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 toward 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 Runways 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 Runways 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 Runways income statement?

2. When would Runway record the $25 Referral Credit? What are the journal entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? What are the journal entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer?