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 $25
credit towards the purchase of future merchandise. The terms of the program are as
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
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.
1. How should the $25 Referral Credit be recorded in Runway’s Income Statement
— as a reduction of revenue or as a marketing expense?
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?
What are the entries Runway would record when the $25 Referral Credit is
redeemed against a $100 purchase made by the Existing Customer?
3. Runway is planning to adopt IFRSs in the near future. What is the relevant
accounting guidance they would follow under IFRSs?