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Audit Staff
From: Ricardo Colon, Audit Partner Date: April 8, 2016
Subject: Audit of Express, Inc.
You have been assigned to audit the 2015 year-end financial statements Express, Inc. Mr. Ricardo Colon, audit partner, has questions concerning the accounting for a marketing pogram implemented in 2015 to increase sales.
Express, Inc. (“Express” or the “Company”) is a publicly held online retailer that sells discounted high-end fashion. In an effort to increase its sales and customer base, Express implemented a customer referral marketing campaign (the “Refer-a-Friend Program”) whereby existing customers can refer friends to Express and receive a $50 credit towards the purchase of future merchandise. The terms of the program are as follows:
Express offers existing customers (the “Existing Customer”) a $50 credit (the “$50 Referral Credit”) if the Existing Customer refers a friend (the “New Customer”) to Express’ Web site and the New Customer purchases merchandise from Express. After a purchase is made by the New Customer, the Existing Customer receives a $50 credit to beapplied to a future purchase from Express.
The $50 Referral Credit represents the fair value of the cost Express 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 Express’ customers and does not need to be combined with any initial or existing purchases.
The main accounting issues regarding this marketing program are:
1. How should the $50 Referral Credit be recorded in Express’ Income Statement— as a reduction of revenue or as a marketing expense. ASC 605-50-45-3 says it is accounted for as an expense. Example 605-50-55-43
2. What are the journal entries Express would record when the $50 Referral Credit is earned by the Existing Customer?
3. When would Express record

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