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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

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 Website 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. According to ASC 606, 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?

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