Universal School Supply Retailer, Inc (“USSR”) is a retailer of clothing, equipment, supplies, and other products targeted at students from grade school to college level. USSR is offering a promotion during August in which customers who spend a minimum of $100 will receive a $20gift card that can be applied to their next purchase at USSR. These gift cards expire on November 1 of the current year and cannot be redeemed for cash. The main issues involved in this situation are when to recognize the revenue associated with the gift cards and how to record the transaction. These issues are addressed by multiple sections of GAAP, including the following:
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a. Relatively long periods in which a particular rebate or refund may be claimed. b. The absence of historical experience with similar types of sales incentive programs with similar products or the inability to apply such experience because of changing circumstances. c. The absence of a large volume of relatively homogeneous transactions. According to the case facts USSR has absence of historical experience.
many factors and circumstances that will vary from case to case. However, it does list the following as factors that may impair vendor’s ability to make a reasonable and reliable estimate:* Relatively long periods in which a particular rebate or refund can be claimed* The absence of historical experience with similar types of sales incentive programs with similar products* The absence of a large volume of relatively homogeneous transactions.
Based in this information USSR first alternative is record two transactions on the date of the purchase. For this scenario, we will recognize the full $20 as a liability, as the company does not have a historical experience and should recognize the large number possible as liability. In this case the journal entry will be
Cash/ AR $100
Deferred Revenue $20
And the second JE
Direct cost of sales $50
The effects in the balance sheet using this alternative is maximizing the potential liability, and reduce the revenue in the...