Reference no: EM13912856
Runway Discount ("Runway" or the "Company") is a privately held online retailer that sells discount high-end fashion. On January 1, 2015 in 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 $25 credit towards the purchase of future merchandise. The terms of the program are as follows:
Runway offers existing customers (the "Existing Customer") a $25 gift card if the Existing Customer refers a friend (the "New Customer") to Runway's website and the New Customer purchases merchandise from Runway.
After a purchase is made by the New Customer, the Existing Customer receives a $25 gift card that can be applied to a future purchase from Runway.
The $25 Referral Gift Card 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.
Assume the following:
On September 20, 2015 Professor Smith refers her friend Jean Tierney to Runway. Jean makes a $100 purchase on October 3, 2015. Smith uses her credit when purchasing $100 of merchandise on November 1, 2015.
Required:
a. Where in the codification did you find the guidance?
b. If a credit should be recorded related to Smith's referral of Jean Tierney then how should the $25 Referral Gift Card be recorded in Runway's Income Statement? When would Runway record the Referral Gift Card?
c. What (if any) are the entries Runway would record when the $25 Referral Gift Card is redeemed against a $100 purchase made by the Professor Smith?
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