Sweeties Sweet Shops manager, Candy Two-Tooth, recently read the following, More than 90% of companies have some type of loyalty program. Loyalty programs are an effective tactic for increasing revenue and inspiring customer loyalty. Consumer studies indicate that as many as 84% of customers say they are more likely to stick with a brand that offers a loyalty program. Another 66% of those customers state they are more likely to change their spending based on reward programs. Because customers are influenced by and attracted to loyalty programs, they are an increasingly popular mode of advertising and sales for a company. Companies know it is easier to keep an existing customer rather than attract a new one.

This article peeks Candys interest because she is evaluating alternative marketing approaches to increase sales and customer retention. One marketing plan under evaluation is to offer customers a free candy bar after 10 purchases of candy. Customers will be issued a punch card to track purchases and eligibility for a free candy bar. After, 10 punches the card is turned in for a free candy bar.

Sally Sugarfoot, the companys owner, is not sure how the new plan will affect accounting procedures. She realizes that the company will be incurring costs each time a free candy bar is redeemed, but there will be no corresponding revenue or cash inflow. Candy Two-Tooth has enlisted your help as the resident expert on revenue recognition to help determine the appropriate accounting treatment if the market strategy is deployed. That treatment should describe when revenue is recognized and how it will be calculated. Required:

1. Draft a memo response to Sally Sugarfoot explaining how to account for the punch card and the optional free candy bar.

Hint: consider the performance obligations criteria of revenue recognition standards. If a performance obligation exists (and explain your conclusion based on criteria of performance obligation), determine how to allocate to the transaction price. It might be helpful to create a selling price of a candy bar and to determine any estimated redemption of punch cards by customer to explain your analysis.