MEMORANDUM

TO: Professor John Eckroth
DATE: 12/03/2013
SUBJECT: Project #2 – PPP Fashions, Inc.

The purpose of this memo is to address the accounting issues related to how PPP Fashions should record the $25 Referral Credit on the books. The Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic No. 605-50 (Revenue Recognition/Customer Payments and Incentives) provides guidance pertaining to sales incentives including discounts on future purchases. The general rule of accounting for coupons and discounts indicates sales incentives that are offered voluntarily, without charge by a company, may be used by a customer as a result of a single transaction, and will not result in loss on the sale are recognized at the later of: a) The date at which the related revenue is recorded by the vendor, or b) The date at which the sales incentive is offered.
The Referral Credit, once redeemed by the Existing Customer, has an impact on the future sales transaction; therefore, the company should record it as a reduction of revenue when the related revenue is recognized.
The Referral Credit is recorded at the time earned when the New Customer makes a purchase. The company would recognize the expense as a debit to the Referral Credit expense account and credit the contra revenue account, Referral Credit Allowance. At the time the Existing Customer makes the purchase, the company will recognize the Referral Credit by debiting the Referral Credit Allowance to offset the sales.

The Journal Entries for these transactions are illustrated as follows:
To record the $25 Referral Credit when earned by the Existing Customer:
Dr Referral Credit Expense $25
Cr Referral Credit Allowance $25

To record the $25 Referral Credit when redeemed against a $100 purchase made by Existing Customer:
Dr Account Receivable $ 75
Dr Referral