Revenue Recognition Revenue from sales of the Company's 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. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on historical experience. ECommerce revenue from sales of products ordered through the Company's websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Company's cost of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Company's 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 product's functionality, undelivered software elements that relate to the tangible product's 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 with the purchase of a NOOK from the Company. Using the relative selling-price method 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 is deferred and recognized on a straight-line basis over the 2-year estimated life of a NOOK device. The average percentage of a NOOK's sales price that is deferred for undelivered items and recognized over its 2-year estimated life ranges between 0% and 5%, depending on the type of device sold. The amount of NOOK-related deferred revenue as of April 29, 2017 and April 30, 2016 was $226 and $160, respectively. These amounts are classified on the Company's 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 distributed NOOK a commission on the content sales sold through that device. The Company accounted for these transactions as a reduction in the sales price of the NOOK based on historical trends of content sales and a liability was 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 does not 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 physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. 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 www.barne-sandnoble.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 Company's eBooks 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, for an annual fee of $25.00, which is nonrefundable after the first 30 days. Revenue is recognized over the 12-month period based upon historical spending patterns for Barnes & Noble Members.

1. 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.

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

b. 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

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

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

4.For e-textbooks, B&N uses the agency model. How much revenue would it record for each sale? The full price of the textbook, or the commission earned on the sale?

5. B&N records the rental of a physical textbook as deferred revenue and recognizes revenue

over the rental period. Why can't B&N record the entire rental revenue at the time of the sale?