(Warranty, Customer Loyalty Program) Hale Hardware takes pride as the “shop around the corner” that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line. 1. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufacture winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches during 2019 at a total price of $21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is $16,000. The assurance warranties extend for a 3-year period with an estimated cost of $2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for $400 each. 2. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every $10 of purchases on a select group of Hale products. Each point is redeemable for a $1 discount on any purchases of Hale merchandise in the following 2 years. During 2019, customers purchased select group products for $100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is $100,000. Based on prior experience with incentives programs like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points). Instructions a. Identify the separate performance obligations in the Hale warranty and bonus point programs, and briefly explain the point in time when the performance obligations are satisfied. b. Prepare the journal entries for Hale related to the sales of Hale winches with warranties. c. Prepare the journal entries for the bonus point sales for Hale in 2019. d. How much additional sales revenue is recognized by Hale in 2020, assuming 4,500 bonus points are redeemed?
(Warranty, Customer Loyalty Program) Hale Hardware takes pride
as the “shop around the corner” that can compete with the big-box home
improvement stores by providing good service from knowledgeable sales
associates (many of whom are retired local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers
and increase its bottom line.
1. Hale sells a specialty portable winch that is popular with many of the local
customers for use at their lake homes (putting docks in and out, launching
boats, etc.). The Hale winch is a standard manufacture winch that Hale
modifies so the winch can be used for a variety of tasks. Hale sold 70 of
these winches during 2019 at a total price of $21,000, with a warranty
guarantee that the product was free of any defects. The cost of winches sold
is $16,000. The assurance warranties extend for a 3-year period with an
estimated cost of $2,100. In addition, Hale sold extended warranties related
to 20 Hale winches for 2 years beyond the 3-year period for $400 each.
2. To bolster its already strong customer base, Hale implemented a customer
loyalty program that rewards a customer with 1 loyalty point for every $10 of
purchases on a select group of Hale products. Each point is redeemable for
a $1 discount on any purchases of Hale merchandise in the following 2
years. During 2019, customers purchased select group products for
$100,000 (all products are sold to provide a 45% gross profit) and earned
10,000 points redeemable for future purchases. The standalone selling price
of the purchased products is $100,000. Based on prior experience with
incentives programs like this, Hale expects 9,500 points to be redeemed
related to these sales (Hale appropriately uses this experience to estimate
the value of future consideration related to bonus points).
Instructions
a. Identify the separate performance obligations in the Hale warranty and
bonus point programs, and briefly explain the point in time when the
performance obligations are satisfied.
b. Prepare the
with warranties.
c. Prepare the journal entries for the bonus point sales for Hale in 2019.
d. How much additional sales revenue is recognized by Hale in 2020,
assuming 4,500 bonus points are redeemed?
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