Van Department Store grants loyalty awards to its customers.
For every P500 purchase made by
the customer, the customer receives a credit of 10 points equivalent to P10. The
accumulated points may be used by the customer as part or full payment for merchandise
purchased in the future.
During the year 2014, the company made sales aggregating P5, 000,000 on which 100,000
points were awarded to customers. Of the P5, 000,000, 2% is considered to be allocable to
the customer loyalty awards. During the same year, 25,000 points were redeemed, and at
December 31, 2014, it is expected that a total of 90,000 points would be redeemed relating
to 2014 sales.
During 2015, an additional 35,000 points awarded in 2014 were redeemed and Van
Department Store revised its estimate of total redemption for points granted in 2014 at
95,000 points.
REQUIRED:
(a) Determine the amount of revenue recognized as a result of redemption of reward points in
years 2014.
(b) Determine the amount of revenue recognized as a result of redemption of reward points in
years 2015.
(c) Determine the amount of liability to be presented in the statement of financial position
relating to customer loyalty awards at December 31, 2014.
(d) Determine the amount of liability to be presented in the statement of financial position
relating to customer loyalty awards at December 31, 2015.
Total customer loyalty program = 2% of Sales
= 2% * P5,000,000
= P100,000
Value of 1 point = 10 points / P10
= P1
Part a :
Total points provided to customers = 100,00 points
Total value of points provided in the year 2014 = 100,000 points * P1 per point
= P100,000
Total points redeemed = 25,000 points
Expected points to be redeemed = 90,000 points
Remaining expected expired points = Total points - Total expected points to be redeemed
= 100,000 points - 90,000 points
= 10,000 points
Total revenue from the reward point for the company = 10,000 points * P1 per point
= P10,000
In accordance with the guidelines issued by GAAP, those companies which are providing rewards to
the customers, need to record the revenue from the redemption of reward points as the deferred
revenue till the period they are actually received by the company. Since, at the end of December, 2014
it was expected that the company would redeem 90,000 points, the remaining 10,000 points are still on
hold to be received by the company as revenue.
Therefore, the company would recognized P10,000 as deferred revenue for the period 2014.
Part b :
Now, in the year 2015, the company paid the additional 35,000 points of the year 2014 in this year
because of which the company revised its expected redemption point to 95,000. This revision of
redemption points would lower down the deferred revenue for the current year as follows :
Points revised = 95,000 points
Total points still on hold = 100,000 points - 95,000 points
= 5,000 points
Deferred revenue for 2015 = 5,000 points * P1 per point
= P5,000
Therefore, the company would recognized P5,000 as deferred revenue for the period 2015.
Part c :
For the period 2014, the liability of the company towards the customer loyalty program is calculated as
follows :
Total loyalty program value = P100,000
Value of points redeemed (2014) = 25,000 points * P1 per point
= P25,0000
Liability towards customer loyalty program = P100,000 - P25,000
= P75,000
Therefore, the company would recognized P75,000 as liability towards the customer loyalty
program for the period 2014.
Part c :
For the period 2015, the liability of the company towards the customer loyalty program is calculated as
follows :
Liability outstanding towards loyalty program = P75,000
Value of points redeemed (2015) = 35,000 points * P1 per point
= P35,0000
Liability towards customer loyalty program = P75,000 - P35,000
= P40,000
Therefore, the company would recognized P40,000 as liability towards the customer loyalty
program for the period 2015.
