II. Revenue Recognition Cases

In class we discuss broad revenue recognition principles and a selection of specific situations (e.g., bill-and-hold sales, consignments, etc.). The purpose of these three cases is to expose you to the accounting for revenues in other unique situations in addition to those discussed in class. For each case, you will need to research online the appropriate accounting (under current, not future, revenue recognition rules) and then answer the questions below.

Accounting for Gift Cards

Mr. Pings Noodle Shop opened in December 2015 with locations in Maryland and Delaware. As a holiday promotion, it offered for sale $25 gift cards for a discounted price of $20.

The following information is available as of Dec. 31, 2015:

	Maryland	Delaware
a. Number of gift cards sold	250	100
b. Value of gift cards sold (= a $25)	$6,250	$2,500
c. Cash collected from gift card sales (= a $20)	$5,000	$2,000
d. Amount of gift card redemptions	$900	$350
e. Remaining gift card balances (= b d)	$5,350	$2,150
f. Expected future gift card redemptions	$4,100	$1,650
g. Expected unused gift card balances (= e f)	$1,250	$500

Escheat laws in Delaware require that unclaimed property, including unused gift card balances, must be turned over to the state after it becomes clear the customer will not redeem the remaining balance. Gift cards are exempt from escheat laws in Maryland.

1. How much revenue should Mr. Ping recognize in 2015 for gift card sales in Maryland?

2. How much revenue should Mr. Ping recognize in 2015 for gift card sales in Delaware?

- For 1 and 2, show your calculations and briefly explain your reasoning behind them. Then provide the journal entries that Mr. Ping would record during 2015 for these gift cards.

Gross vs. Net Recognition of Revenues

Genco Import Company is an Internet-based online shopping platform that sells products to customers on behalf of various suppliers. Suppliers submit their product offerings, specifications, and prices to Genco, which Genco displays on its website. At the time of each customer order, Genco collects payment from the customer and directs the supplier to ship directly to the customer. Genco keeps a 15% of the sales price and forwards the remaining 85% to the supplier. During 2015, Genco collected $2,000,000 from customers and forwarded $1,700,000 to suppliers.

1. How much revenue should Genco recognize during 2015 for these sales? Justify your answer using the guidelines in EITF 99-19.

Accounting for Sales Incentives

Bubbles Depo advertises that with each mattress purchased, customers will receive a free 30 television. Mattresses sell for $1,300 and have a 70% margin. The televisions cost Bubbles $210 each.

The following information is available for sales during 2015:

a. Number of mattresses sold	100
b. Cost of mattresses sold (= a $390)	$39,000
c. Price of mattresses sold (= a $1,300)	$130,000
d. Cost of televisions (= a $210)	$21,000

1. Should the $21,000 cost of televisions be reported as a reduction in revenue, cost of goods sold, or some other expense? Justify your answer using the guidelines in EITF 01-9.

2. Given the answer to #1 above, how much revenue should Bubbles recognize in 2015 for mattress sales?