Revenue Recognition and Sales Allowances

Target Corporation reported the following on its income statement.

For $12$ Months Ended $($$ millions$)$ Feb. $2,2019$ Feb. $3,2018$ Jan. $28,2017$

Total revenue $$70,835$ $$68,351$ $$66,055$

Cost of sales $50,10148,05846,196$

The revenue recognition footnote from the $10$K for the year ended February $2,2019,$ includes the following.

$$ We record almost all retail store revenues at the point of sale.

$$ Digital channel sales include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store.

$$ Total revenues do not include sales tax because we are a pass$-$through conduit for collecting and remitting sales taxes.

$$ Generally, guests may return national brand merchandise within $90$ days of purchase and owned and exclusive brands within one year of purchase. Revenues are recognized net of expected returns, which we estimate using historical return patterns as a percentage of sales and our expectations of future returns.

$$ Revenue from gift card sales is recognized upon gift card redemption. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as $$breakage$.$ Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions.

$$ Guests receive a $5$ percent discount on virtually all purchases and receive free shipping at Target.com when they use their REDcard. This discount is included as a sales reduction in our Consolidated Statements of Operations and was $$896$ million, $$877$ million, and $$845$ million in the fiscal years ended February $2019,2018,$ and $2017$ respectively.

Required

a$.$ Use the financial statement effects template to record retail cash sales of $$940$ in a state with a sales tax rate of $8\%.$ For this question, assume $10\%$ of all merchandise sold is returned within $90$ days.

Note: For each account category, indicate the appropriate account name. Enter $"$N$/$A$"$ for any account category that is not used for a given transaction.

Note: Indicate a decrease in an account category by including a negative sign with the amount.

$($$ millions$)$ Balance Sheet Income Statement

Transaction Cash Asset $+$ Noncash Assets $=$ Liabilities $+$ Contrib. Capital $+$ Earned Capital Revenues $$ Expenses $=$ Net Income

In$-$store sales

$75\mathrm{.}2$

b$.$ Use the financial statement effects template to record the following transaction: On March $4,$ an internet customer places an order for $$1,880$ and pays online with a credit card $($which is equivalent to cash for accounting purposes$).$ The goods are shipped from the warehouse on March $6,$ and FedEx confirms delivery on March $7.$ Ignore shipping costs, sales tax, and returns.

Note: For each account category, indicate the appropriate account name. Enter $"$N$/$A$"$ for any account category that is not used for a given transaction.

Note: Indicate a decrease in an account category by including a negative sign with the amount.

$($$ millions$)$ Balance Sheet Income Statement

Transaction Cash Asset $+$ Noncash Assets $=$ Liabilities $+$ Contrib. Capital $+$ Earned Capital Revenues $$ Expenses $=$ Net Income

March $4$: Online sale

March $7$: Goods delivered Answer

c$.$ Use the financial statement effects template to record the gift card activity during the fiscal year ended February $2,2019.$ Ignore sales tax and returns. Details are as follows.

Note: For each account category, indicate the appropriate account name. Enter $"$N$/$A$"$ for any account category that is not used for a given transaction.

Note: Indicate a decrease in an account category by including a negative sign with the amount.

$ millions

Gift card liability, February $3,2018$ $$683$

Gift cards issued during current period but not redeemed $606$

Revenue recognized from beginning liability $(500)$

Gift card liability, February $2,2019$ $$789$

$($$ millions$)$ Balance Sheet Income Statement

Transaction Cash Asset $+$ Noncash Assets $=$ Liabilities $+$ Contrib. Capital $+$ Earned Capital Revenues $$ Expenses $=$ Net Income

May: Gift card sale Answer

May: Gift card redemption Answer

d$.$ Determine the amount of revenue Target collected from customers who used their loyalty card $($REDcard$)$ for each of the fiscal years reported above. What proportion of total revenues come from REDcard$$ customers each year?

Note: Round percentage to one decimal place $($for example, enter $6\mathrm{.}7\%$ for $6\mathrm{.}6555\%).$

Fiscal Year Ended $($$ millions$)$ Revenue Collected REDcard transactions to Total sales

$2019$ A