Question

P18-6 (LO3) (Warranty, Customer Loyalty Program) Hale Hardware takes pride as the “shop around the corner” that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line.

1. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufacture winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches during 2017 at a total price of \(21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is \)16,000. The assurance warranties extend for a 3-year period with an estimated cost of \(2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for \)400 each.

2. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every \(10 of purchases on a select group of Hale products. Each point is redeemable for a \)1 discount on any purchases of Hale merchandise in the following 2 years. During 2017, customers purchased select group products for \(100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is \)100,000. Based on prior experience with incentives programs Problems 1045 like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points).

Instructions

How much additional sales revenue is recognized by Hale in 2018, assuming 4,500 bonus points are redeemed?

Short answer

The business entity will recognize additional sales revenue of$4,110.

Step-by-step solution

Definition of Sales Revenue

The revenue generated from the outflow of goods and services from the business entity is sales revenue. It is reported in the income statement of the business entity.

Additional sales revenue

$$\begin{gathered} Additionalsalesrevenue=\frac{Bonuspointreedmed}{Estimatedpoints}\times Liabilitytobonuspoints \\ =\frac{4,500}{9,500}\times \$8,676 \\ =\$4,110 \end{gathered}$$