Runway offers existing customers (the “Existing Customer”) a $25 credit (the “$25 Referral Credit”) if the Existing Customer refers a friend (the “New Customer”) to Runway’s Web site and the New Customer purchases merchandise from Runway. After a purchase is made by the New Customer, the Existing Customer receives a $25 credit to be applied to a future purchase from Runway.
The $25 Referral Credit represents the fair value of the cost Runway would pay to acquire a new customer from an unrelated third party or marketing firm who is not a purchaser of its products. The program is open to all of Runway’s customers and does not need to be combined with any initial or existing purchases. Required:
1. How should the $25 Referral Credit be recorded in Runway’s Income Statement — as a reduction of revenue or as a marketing expense? Explain your answer and support it using the FASB Codification. Your answer should include the Codification reference where you found the applicable guidance.
2. When would Runway record the $25 Referral Credit?
What are the entries Runway would record when the $25 Referral Credit is earned by the Existing Customer? Show entries in proper journal entry form.
What are the entries Runway would record when the $25 Referral Credit is redeemed against a $100 purchase made by the Existing Customer? Show entries in proper journal entry form.
3. Runway is planning to adopt IFRSs in the near future. What is the relevant accounting guidance they would follow under IFRSs? State the proper guidance and give a brief summary of it.