Steig's Sports Store has a customer loyalty program in which it issues points to customers for every cash purchase that can be applied to future purchases. For every dollar spent, a customer receives three points. Each point is worth one cent. There is no expiry date on the points. Steig's estimates that 35% of the points issued will eventually be redeemed. Steig's has a December 31 year end.
The program was started in 2014. During 2014, 900,000 points were issued. In 2015, 1.2 million points were issued. Redemptions total 225,000 points in 2014 and 336,000 in 2015.
Instructions
(a) What amount should be recorded as contra revenue (sales discounts for redemption rewards issued) in 2014? In 2015?
(b) What was the value of the points redeemed in 2014? In 2015?
(c) What is the redemption rewards liability that should be reported at December 31, 2014? At December 31, 2015?
(d) When the points are redeemed, how is this accounted for? What is the impact of the point redemptions on profit?