Caribou County Service Station started a customer loyalty program at the beginning of 2016 in which customers making cash purchases of gasoline at the gas bar are issued rewards in the form of coupons. For each litre of gasoline purchased, the customer gets a coupon for 2.5 cents that can be redeemed in the service department toward such things as oil changes or repairs. The coupons have no expiry date. Caribou County Service Station began selling gift cards in 2017 that do not have expiry dates.

The following are selected transactions in 2016 and 2017:

1. In 2016, the gas bar sold 750,000 litres of gasoline resulting in gas sales of $1,050,000. Service department coupons were issued with these sales. The expected redemption rate for the grocery coupons is 70%.

2. In 2016, customers redeemed $5,950 of the coupons in the service department.

3. In 2017, the gas bar sold 810,000 litres of gasoline, resulting in gas sales of $1,255,000. Service department

coupons were issued with these sales. The expected redemption rate for the grocery coupons is 70%.

4. In 2017, customers redeemed $9,500 of the coupons in the service department. 5. In 2017, customers purchased $3,950 of gift cards, and $1,500 of the cards were redeemed by the end of the year.

Instructions

(a) Indicate if the following items will increase, decrease, or have no effect on each of revenues, expenses, and profit:

1. Issuing coupons when sales are made

2. Redeeming coupons

3. Issuing gift cards

4. Redeeming gift cards

(b) Record the above transactions.

(c) What balances will be included in current liabilities at December 31, 2016 and 2017, regarding the customer loyalty program and gift cards?

Taking It Further

What factors should management consider in determining if current liabilities are correctly valued at December 31, 2017?