Reference no: EM132465084

D&T Case: Refer-a-Friend Program

Runway Discount ("Runway" or the "Company") is a privately held online retailer that sells discounted high-end fashion. In an effort to increase its sales and customer base, Runway implemented a customer referral marketing campaign (the "Refer-a-Friend Program") whereby existing customers can refer friends to Runway and receive a $25credit towards the purchase of future merchandise.

The terms of the program are as follows:

• Runway offers existing customers (the "Existing Customer") a S25 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 aS25 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:

Question 1: According to ASC 606, how should the $25 Referral Credit be recorded in Runway's Income Statement- as a reduction of revenue or as a marketing expense?