Adequate Disclosure
The following information was taken directly from the footnotes to the financial statements of Best Buy:
1. “We recognize revenue at the time the customer takes possession of the merchandise”.
2. “We sell gift cards to customers and initially establish an Unredeemed Gift Card Liability for the cash value of the gift card."
3. Advertising costs are recorded as expenses the first time the advertisement runs."
4. "We compute depreciation using the straight-line method."
a. Discuss what is meant by each of the above footnote items.
b. As noted, Best Buy uses a Unredeemed Gift Card Liability account to record the sale of gift cards. Assume that you purchase a $500 gift card from Best Buy as a birthday present for a friend. Prepare the journal entries made by Best Buy to record (1) your purchase of the gift card and (2) the use of the gift card by your friend to purchase a $500 television.
c. Discuss how the matching principle relates to Best Buy's treatment of advertising expenditures.
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