Product Overview

This case pertains to one of the most important topics in financial accounting and reporting: revenue recognition. It is intended for use in a required MBA financial accounting course or in an MBA elective course in Financial Reporting and Analysis. The company, Better Buy, Inc., is an electronics retailer selling TVs and other electronic products. The company is a bit unique, however, in that it not only sells major brand TVs, but it also sells TVs under its own brand that carry a one-year warranty for which the retailer?not the manufacturer?is responsible. The company also offers an additional two-year warranty on its TVs that also is the sole responsibility of the retailer. The case asks students to address a number of revenue recognition situations along with the associated expenses. These situations include a product sale where the sales price also includes a warranty provision, a "bundle" of a product sale and an extended warranty sale, and a bundle of a product sale and an extended warranty sale where the company has an agreement to outsource the servicing of its extended warranty service

Learning Objectives

This case is intended to introduce students to the conceptual framework surrounding proper revenue recognition and the application of this framework to a series of increasingly complex transactions, where answering the question: “When is a sale a sale?” becomes more difficult. The case also asks students to address the related issue of the expense recognition that should accompany their recommended method of revenue recognition. The assignment requires both a conceptual justification of the revenue recognition methods selected and the journal entries that would be necessary to record the sales and associated expenses. The accounts involved include sales, cost of goods sold, inventory, warranty expense, warranty liability, and deferred (unearned) revenue.