Suppose that you are the manager of a chain of coffee shops and you are planning to launch a loyalty program that will give one free coffee to customers who buy 10 cups of coffee. Customers will be given an electronic "Coffee Club'' card, which will be swiped each time they make a purchase. Your computer system will keep track of how many cups each customer has purchased and will automatically award them a free cup when they have purchased 10.
Discuss the income measurement and liability recognition issues that are presented by this type of customer loyalty program. Your answer should explain how and when the revenues associated with the free cups of coffee should be reported. It should also outline some of the issues that will make it difficult to estimate the amount of the liability for future free coffees arising from current sales.