St. Thomas Auto Repairs is preparing the financial statements for the year ended November 30, 2014. As the accountant, you are looking over the information regarding short-term liabilities, and determining the amounts that should be reported on the balance sheet. St. Thomas Auto Repairs reports under ASPE. The following information regarding new corporate initiatives has been brought to your attention.
1. The company printed a coupon in the local newspaper in November 2014. The coupon permits customers to take 10% off the cost of any service between November 1, 2014, and January 30, 2015. The newspaper has a circulation of 10,000 customers. In November, 30 coupons were used, resulting in sales reductions of $250. It is expected that 50 more coupons will be used before January 30, and the average sales transaction for the company is $75.
2. In order to reduce the costs associated with production downtime due to sick days taken, the company developed a new plan in 2014. Employees are permitted up to six sick days per year with pay. If these days are not all used, then 50% of the unused time will be accumulated and can be used as paid vacation within the next year; otherwise, the rights will expire at the end of the next fiscal year. During 2014, two employees were eligible for the plan and each used two of their six days. The daily rate of pay for each employee is $100. These two individuals are long-term employees of the company who are unlikely to resign in the near future and who have been relatively healthy in the past.
3. The company is considering starting a customer loyalty program. The program would involve tracking the purchases of each customer on a small card that is retained by the customer. Each time a customer reaches $250 in total purchases, a $10 discount would be offered on the next purchase.
Instructions
(a) For items that affect the 2014 financial statements, determine the amount of any liability that should be reported and the related expense.
(b) Discuss the issues that the proposed customer loyalty program raises from an accounting standpoint. Explain how the program should be accounted for.