Question

CA18-7 (Recognition of Revenue—Bonus Points) Griseta&Dubel Inc. was formed early this year to sell merchandise credits to merchants, who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta&Dubel.

The following schedule expresses Griseta&Dubel’s expectations as to the percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year.

Month	Actual credit sale Percent	Merchandise premium purchased percent	Credit Redemption percent
6th	30%	40%	10
12th	60	60	45
18th	80	80	70
24th	90	90	80
30th	100	100	95

Griseta&Dubel plans to adopt an annual closing date at the end of each 12 months of operation.

Instructions

Apply the revenue recognition factors to the Griseta&Dubel Inc. revenue arrangement.

Short answer

The business entity will recognize the revenue when theperformance obligations are satisfied and the credits from the customers are redeemed.

Step-by-step solution

Definition of Credit Sales

The sales for which payment will be received in the future period are known as credit sales. These sales are generally reported as an asset.

Application of Revenue Recognition

The business entity will recognize revenue on completion/satisfaction of the performance and collecting cash from creditors. Here, the performance obligation of the business entity is to deliver premiums. Revenue will be recognized when the business entity makes the bonus points sales. Historical data relating to bonus points will be considered to recognize revenue from bonus points.