Refer a Friend

810 Words Feb 3rd, 2015 4 Pages
Refer-a-Friend Program
Runaway Discount ( the Company) in an effort to increase its sales implemented a customer referral marketing scheme “Refer-a-Friend Program” to increase its customer base. Under this program a $25 credit will be provided to existing customer who refer their friend to the company and referred friend purchases merchandize from the company. The existing customer can apply this credit of $25 to their future purchase from the company.
The application of this program will require additional accounting treatment for the $25 Referral Credit in accordance with FASB codification ASC 605-50-45-1 to 3. The company has to deal with the compliance of these ASC procedures. In addition, as use of the $25 Referral Credit by the
…show more content…
In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit. * The vendor can reasonably estimate the fair value of the benefit identified under the preceding condition. If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount shall be characterized as a reduction of revenue when recognized in the vendor’s income statement.
Question 1
How should the $25 Referral Credit be recorded in Runway’s Income Statement — as a reduction of revenue or as a marketing expense?
Answer to question 1
Since the $25 Referral Credit represents the fair value of the cost of the Company would pay to acquire new customer from an unrelated third party or marketing firm who is not purchaser of its products, the $25 Referral Credit will be characterized as a cost incurred under the accounting head “marketing expense”.
Further, according to FASB codification 605-50-25-3 a sales incentive offered voluntarily by a vendor (the Company) and without charge to customers that can be used or that becomes exercisable by a customer as a result of a single exchange transaction shall

More about Refer a Friend