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

At the end of the first reporting period (July 31, 2017), 10,000 loyalty points are redeemed. Martz continues to expect 25,000 loyalty points to be redeemed in total. Determine the amount of loyalty point revenue to be recognized at July 31, 2017.

Short answer

Loyalty points revenue$24,000.

Step-by-step solution

Definition of Loyalty Points

The points that are given to the customer under a loyalty program are known as loyalty points. Such points can be redeemed by the customer for further purchases.

Loyalty point revenue to be recognized

$$\begin{gathered} Loyaltypointsrevenue=\frac{Pointsredeemed}{Expectedpointsredemption}\times Unearnedsalesrevenue \\ =\frac{10,000}{25,000}\times \$60,000 \\ =\$24,000 \end{gathered}$$