1. How should the $25 Referral Credit be recorded in Runway’s incomestatement?2. When would Runway record the $25 Referral Credit? What are the journalentries Runway would record when the $25 Referral Credit is earned bythe Existing Customer? What are the journal entries Runway would recordwhen the $25 Referral Credit is redeemed against a $100 purchase madeby the Existing Customer?3. Runway is planning to adopt IFRSs in the near future. What is the relevantaccounting guidance it would follow under IFRSs? Runway Discount ("Runway" or the "Company") is a privately held online retailer thatsells discounted high-end fashions. In an effort to increase its sales and customer base,Runway implemented a customer referral marketing campaign (the “Refer-a-FriendProgram") whereby existing customers can refer friends to Runway and receive a $25credit toward the purchase of future merchandise. The terms of the program are asfollows:Runway offers existing customers (the "Existing Customer") a $25 credit (the"$25 Referral Credit") if the Existing Customer refers a friend (the "NewCustomer") to Runway's Web site and the New Customer purchases merchandisefrom 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 toacquire a new customer from an unrelated third party or marketing firm who is not apurchaser of its products. The program is open to all of Runway's customers and does notneed to be combined with any initial or existing purchases.

International Financial Reporting Standards (IFRS) are those accounting standards which have been…

Answered: 1. How should the $25 Referral Credit…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1. How should the $25 Referral Credit be recorded in Runway’s 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?
3. Runway is planning to adopt IFRSs in the near future. What is the relevant
accounting guidance it would follow under IFRSs?

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 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.

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