Accounting question

Question

IGNORE VAT. ROUND OFF TO THE NEAREST RAND.

FlyHigh is a South African airline and has a loyalty program that rewards its customers with

two loyalty points for every R125 spent on flights. Each point is redeemable for a R10 discount

on a future flight with the airline in addition to any other discount being offered. Customers

collectively spent R1 000 000 on flights in 2014 and earned 8 000 points redeemable against

future purchases. The stand-alone selling price of the purchased flights is R1 000 000, as the

price charged to customers is the same whether the customer participates in the loyalty program

or not. FlyHigh expects 75% of the points granted will be redeemed. FlyHigh therefore

estimates a stand-alone selling price of R7.50 per point (R60 000 in total), which takes into

account the likelihood of redemption. 40 000 points were redeemed during the 2015 financial

year.

FlyHigh concludes that the points provide a material right to customers that they would not

receive without entering into a contract; therefore, the points provided to the customers are

separate performance obligations. FlyHigh has a 31 December 2015 financial year end.

Required:

Calculate the revenue and the contract liability to be recognized for the year ended

31 December 2015.

Answer 1

Contract revenue R1000 000

Contract liability R60 000 reduced over a period of redemption.

Contract revenue on points redemption R300 000. Inwhich R60 000 liability is netted off.

Total revenue from customers would be R1240 000

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