Question

P18-7 (LO3) (Customer Loyalty Program) Martz Inc. has a customer loyalty program that rewards a customer with 1 customer loyalty point for every \(10 of purchases. Each point is redeemable for a \)3 discount on any future purchases. On July 2, 2017, customers purchase products for \(300,000 (with a cost of \)171,000) and earn 30,000 points redeemable for future purchases. Martz expects 25,000 points to be redeemed. Martz estimates a standalone selling price of \(2.50 per point (or \)75,000 total) on the basis of the likelihood of redemption. The points provide a material right to customers that they would not receive without entering into a contract. As a result, Martz concludes that the points are a separate performance obligation.

Instructions

Prepare the journal entries to record the sale of the product and related points on July 2, 2017.

Short answer

Both sides of the journal totals$471,000.

Step-by-step solution

Definition of Performance Obligation

The promise made bythe party involved in the transaction to provide goods on time against specified consideration is the performance obligation.

Journal Entries to Record the Sale of Product

Date	Accounts and Explanation	Debit $	Credit $
2 July 2017	Cash	$300,000
	Unearned sales revenue		$60,000
	Sales revenue		$240,000
2 July 2017	Cost of goods sold	$171,000
	Inventory		$171,000
		$471,000	$471,000