Barnes and Noble Revenue Recognition Revenue from sales of the Companys products is recognized at the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. Certain of the Company sales agreements with its distribution partners contain rights of inspection or acceptance provisions as is standard in the Companys industry. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience and industry standards. ECommerce revenue from sales of products ordered through the Companys websites is recognized upon delivery and receipt of the shipment by its customers. Sales taxes collected from retail customers are excluded from reported revenues. All of the Companys sales are recognized as revenue on a net basis, including sales in connection with any periodic promotions offered to customers. The Company does not treat any promotional offers as expenses. In accordance with ASC 605-25, Revenue Recognition, Multiple Element Arrangements and Accounting Standards Updates (ASU) 2009-13 and 2009-14, for multiple-element arrangements that involve tangible products that contain software that is essential to the tangible products functionality, undelivered software elements that relate to the tangible products essential software and other separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendorspecific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK device revenue is recognized at the segment point of sale. The Company includes post-service customer support (PCS) in the form of software updates and potential increased functionality on a when-and-if-available basis, as well as wireless access and wireless connectivity with the purchase of a NOOK from the Company. Using the relative selling price described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK and the software essential to its functionality is recognized at the time of sale, provided all other conditions for revenue recognition are met. Revenue allocated to the PCS and the wireless access is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK. The average percentage of a NOOKs sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 6%, depending on the type of device sold. The amount of NOOK-related deferred revenue as of May 2, 2015 and May 3, 2014 was $2.4 million and $9.9 million, respectively. These amounts are classified on the Companys balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year. The Company also pays certain vendors who distribute NOOK a commission on the content sales sold through that device. The Company accounts for these transactions as a reduction in the sales price of the NOOK based on historical trends of content sales and a liability is established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company doesnot meet the criteria for gross revenue recognition under ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent, on a net basis. All other revenue is recognized on a gross basis. The Company rents both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is imbedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer the Companys obligation is complete. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale. NOOK acquires the rights to distribute digital content from publishers and distributes the content on barnesandnoble.com, NOOK devices and other eBookstore platforms. Certain digital content is distributed under an agency pricing model in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Companys eBook sales are sold under the agency model. The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive offers and promotions via e-mail or direct mail generally for an annual fee of $25.00, which is non-refundable after the first 30 days. Revenue is recognized over the twelve-month period based upon historical spending patterns for Barnes & Noble Members.

PLEASE SHOW WORK

1. Barnes and Noble (B&N) does not record revenue at the time of shipment for goods shipped with the terms FOBDestination. Explain why. (5 points)

2. When B&N sells merchandise with right of inspection or acceptance, it still records the revenue at the time of sale and estimates the sales returns in the same period. Assume B&N sells $200,000 of merchandise and the estimated sales returns is 2% of sales. Show the journal entry that would be made to record this sale (ignore the effect on inventory). (5 points)

Date	Accounts	Debit	Credit

Show computations:

3. What two items does B&N use to estimate sales returns? (4 points)

A.

B.

4. When B&N records sales with multiple elements it uses the relative selling price method. Assume that the NOOK device sells for $100 including the software. Similar devices sell for $90 without the software and similar software sells for $50.

1. Compute the amount of revenue related to the device and the software. Show your computations. (5 points)

2. The footnote indicates that the revenue from the software is recognized over a two-year period. Show the journal entry to record the sale of 70 NOOKs for cash. (Ignore the effect on inventory) (5 points)

Date	Accounts	Debit	Credit

Computations:

5. For extended warranties, digital content, service contracts and other products, B&N determines whether it is a principal or an agent in the transaction and records the transaction accordingly. From our text, list three criteria that B&N would consider when determining whether they are a principal or agent in the transaction. (6 points)

A.

B.

C.

6. For rental of textbooks, B&N records the revenue from an online rental at the time of sale, whereas the rental of a physical textbook is deferred and recognized over the rental period. Why can B&N record the online rentals at the time of the sale? (5 points)

7. Read the updated information about ASU No. 2014-9, Revenue from Contracts with Customers (shown after the footnote), then read the footnote. What has changed regarding since the issuance of B&Ns financial statements? (5 points)

This is the end of Case 1. Save your file and upload it to the Blackboard box provided.