Codification Case

1. According to the FASB codification 605-50-45-2, a cash consideration given to a customer by a vendor is considered to be a reduction in the selling prices of the products or services sold, which would mean that these cash considerations would be considered a reduction in the revenue of the vendor. However, the consideration can be considered an expense only if it meets sections a & b. Section a of 45-2 states that the consideration must produce an identifiable benefit separable from the recipient’s purchase, such that the vendor could have attained the benefit via a third party without the purchaser. Part b states that the value provided must be reasonably estimable by the vendor. Runway meets these requirements, because the $25 credit represents the fair value of a new customer if Runway were to use a marketing firm to acquire them (fair value, third party). Therefore, by meeting the requirements of 45-2 a and b, the $25 referral credits should be recorded as a marketing expense in Runway’s income statement.

2. According to codification 605-50-25-3, the vendor should recognize the cost at the later of a: the date at which the revenue is recognized by the vendor or b: the date at which the incentive is offered. According to this codification, Runway should recognize the cost of the $25 referral when they recognize the revenue from the referred customer.

3. Runway would debit a Marketing Expense account for $25 and credit a liability account such as Sales Credits for $25.

4. Runway would debit a liability account (Sales Credits) for $25, and then debit Cash or Accounts Receivable for $75 depending on mode of purchase, and finally credit Sales Revenue for $100.