Super Electronics, Inc.: Financial Reporting
Of Sales Incentives and Vendor Allowances
Using FASB Codification
SUPER ELECTRONICS SOURCES OF REVENUE
Super Electronics, Inc. is a company that deals in the selling of the electronic products, which are categorized as for consumers, office, entertainment software, appliances and it also provides services to its customers regarding these products. It is generally a regional specialty retailer.
There are currently three sources from where the company generates its revenues:
- Selling of its products and services.
- Refund from vendors against purchases.
- Membership of customers (Customer Loyalty program).
The first source is from the company’s core operations for which the company has been established. The revenue from the second source is in a condition set by the vendor that if the purchases in the 3 years exceed $150 million, then the company will be eligible for a total discount of 8% in 3 years. Moreover, the last source is the membership fee obtained by the company from its customers as per its customer loyalty program.
ACCOUNTING FOR MEMBERSHIP FEES
Super Electronics has initiated a program for maintaining its customer loyalty in which it provides the customers with promotional offers such as discounts, coupons, event invitation etc. upon signing a membership agreement by paying a fee of $24 per year. It has also included a clause of refund of the fees for the unused membership months, if the customer is dissatisfied. According to the standards, Super Electronics should record this transaction as an unearned membership fee in the liability section and cash on the asset side.
When Super Electronic fulfills the above mentioned services, the amount of unearned fee should be transferred to the revenue account / retained earnings. It can be summarized that the membership fee should be accounted as a revenue over-time.(606, 2015)
RECOGINITION OF THE AMOUNT OF MEMBERSHIP FEES:
The calculation will be different from case to case. In this case, it is assumed that there will be no cancellation of membership. The basic principle that should be followed is “revenue is recognized when all the risks and rewards associated with it have been transferred.
| Membership Fees (2008) | |
| Formula:{(a*b*c) = d} | |
| No. Of Members Per Month (a) |
25000 |
| Membership fee per member (b) |
$24 |
| Months (c ) |
12 |
| Total (d) |
$7,200,000 |
| Membership Fees (2008) | ||
| Formula:{(a*b*c) = d} | ||
| No. Of Members Per Month (a) | 25,000 | |
| Membership fee per member (b) | $ 24 | |
| Months (c ) | 12 | |
| Total Fees (d) | $ 7,200,000 | |
| Adjustments: | ||
| No. of cancelled members (20%) |
5000 |
|
| Membership month remaining |
6 |
|
| Refund Amount |
$720,000 |
$ 720,000 |
| Adjusted Fees | $ 6,480,000 |
In this second case, it is assumed that 20% of the customers cancel their membership after 6 months:
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