Case 13-1Refer-a-Friend ProgramRunway Discount (“Runway†or the “Companyâ€) is a privately held online retailer thatsells discounted high-end fashion. In an effort to increase its sales and customer base,Runway implemented a customer referral marketing campaign (the “Refer-a-FriendProgramâ€) whereby existing customers can refer friends to Runway and
Case 13-1Refer-a-Friend ProgramRunway Discount (“Runway†or the “Companyâ€) is a privately held online retailer thatsells discounted high-end fashion. In an effort to increase its sales and customer base,Runway implemented a customer referral marketing campaign (the “Refer-a-FriendProgramâ€) whereby existing customers can refer friends to Runway and receive a $25credit towards the purchase of future merchandise. The terms of the program are asfollows:Runway offers existing customers (the “Existing Customerâ€) a $25 credit (the“$25 Referral Creditâ€) if the Existing Customer refers a friend (the “NewCustomerâ€) 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.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 earnedby the Existing Customer?What are the entries Runway would record when the $25 Referral Credit isredeemed against a $100 purchase made by the Existing Customer?3. Runway is planning to adopt IFRSs in the near future. What is the relevantaccounting guidance they would follow under IFRSs?
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