Required:Read the attached case. Assume you are auditing Runway Discount. The partner of your engagement teamasked you to prepare a memo that addresses the questions at the end of the case. Your memo should thoroughlyand concisely address the questions, including your opinion, and valid arguments to support your opinion. Allconclusions and recommendations in your memo should be properly supported. The memo should be amaximum of the 2 pages. Supporting documents in addition to the 2 page memo are permitted, i.e. the memoitself cannot exceed 2 pages, but appendices can be attached in addition to the memo.You may do the research part of the assignment with other people. However, the writing needs to be your own.If I suspect that your writing is similar to another person’s writing, I will give failing grades to both. I will notgive the benefit of the doubt.The FASB Codification website should be used to find appropriate guidance. The login address for the FASBCodification website is http://aaahq.org/ascLogin.cfm and the username and password for NMSU
students are as follows:
Username – AAA53028Password – MmUe39ZAdditionally, the following website will be useful for IFRS standards:http://www.iasplus.com/en/standardsHint: Focus on the following pronouncements:
ASC 605-50 Revenue Recognition: Customer Payments and Incentives (ASC 605-50) IAS 18, Revenue (IAS 18) IFRIC Interpretation 13, Customer Loyalty Programmes (IFRIC 13)
Username – AAA53028Password – MmUe39ZAdditionally, the following website will be useful for IFRS standards:http://www.iasplus.com/en/standardsHint: Focus on the following pronouncements:
ASC 605-50 Revenue Recognition: Customer Payments and Incentives (ASC 605-50) IAS 18, Revenue (IAS 18) IFRIC Interpretation 13, Customer Loyalty Programmes (IFRIC 13)
Grading Criteria:The memo will be evaluated in the following areas:
Critical Thinking: The memo will be evaluated on the memo’s ability to draw meaningful conclusions andrecommendations that are supported by valid arguments. (5 pts.)
Writing Skills: The memo will be evaluated on the quality of the writing and the ability of the memo tocommunicate clearly (i.e. the report should be written clearly and concisely, and be free of spelling andgrammatical errors). (10 pts.)
Overall Quality: The memo will be evaluated on its overall effectiveness in presenting your analysis andconclusions. (5 pts.)
Case 13-01Refer-a-Friend Program
Runway Discount (“Runway” or the “Company”) is a privately held online retailer thatsells discounted high-end fashion. In an effort to increase its sales and customer base,Runway implemented a customer referral marketing campaign (the “Refer-a-FriendProgram”) whereby existing customers can refer friends to Runway and receive a $25credit towards the purchase of future merchandise. The terms of the program are asfollows:Runway offers existing customers (the “Existing Customer”) a $25 credit (the“$25 Referral Credit”) if the Existing Customer refers a friend (the “NewCustomer”) 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 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 toacquire a new customer from an unrelated third party or marketing firm who is not apurchaser of its products. The program is open to all of Runway’s customers and does notneed to be combined with any initial or existing purchases.
Required:
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 isredeemed against a $100 purchase made by the Existing Customer?
3. Runway is planning to adopt IFRSs in the near future. What is the relevantaccounting guidance they would follow under IFRSs?
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