When points are granted in conjunction with a sale transaction, the sale is recorded for the full amount of the sale. An estimate of the cost of goods to be obtained through point redemption is recorded at the same time. For example, a sale of $100 is recorded, along with its $75 cost of goods sold. Points are issued that are expected to be redeemed for goods with a retail price of $4 and a cost of $3. Accordingly, a $3 expense and liability is recorded at the same time as the sale. When points are redeemed, inventory is reduced, at its $3 cost, and the liability is reduced. The overall liability balance is carefully reviewed each quarter, and adjusted up or down for shifts in cost expectations, redemption levels, and changes to the percentages redeemed under "bonus" conditions

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The passage describes the accounting process for a company that offers a loyalty program with points ... View the full answer