Income Statements » What’s Behind Income Statements » Exercises
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E X E R C I S E S
is.wbn.is.je.050 Recording entries and determining financial-statement effects (Best Buy)
Base your responses to parts (a)-(d) on the accounts on page 6 and Best Buy’s financial
statements on pages 7-9 and the following excerpt from the Revenue Recognition section
of Best Buy’s Summary of Significant Accounting Policies footnote (Best Buy’s 2011 10K,
Page 77).
Gift Cards
We sell gift cards to our customers in our retail stores, through our Web sites and
through selected third parties. We do not charge administrative fees on unused gift
cards, and our gift cards do not have an expiration date. We recognize revenue from
gift cards when: (i) the gift card is redeemed by the customer, or (ii) the likelihood of
the gift card being redeemed by the customer is remote (“gift card breakage”), and we
determine that we do not have a legal obligation to remit the value of unredeemed gift
cards to the relevant jurisdictions. We determine our gift card breakage rate based upon
historical redemption patterns. Based on our historical information, the likelihood of
a gift card remaining unredeemed can be determined 24 months after the gift card is
issued. At that time, we recognize breakage income for those cards for which the likelihood of redemption is deemed remote and we do not have a legal obligation to remit
the value of such unredeemed gift cards to the relevant jurisdictions. Gift card breakage
income is included in revenue in our Consolidated Statements of Earnings.
Gift card breakage income was as follows in fiscal 2012 , 2011 and 2010 [in millions]:
Gift card breakage income
2012
$54
2011
$51
2010
$41
Required
(a) Record Best Buy’s journal entry when a customer purchased a gift card for $50 during the year ended March 3, 2012. Write your journal entry in the space provided
below using the most appropriate accounts from the list on page 6.
Note: Four rows have been provided, but you may not need them all.
Recognize $50 gift card sale
Debit
Credit
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Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
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NAVIGATING ACCOUNTING®
(b) Identify the Best Buy financial statement line items that would have been directly affected (and the direction
of the effects) if Best Buy had recorded the journal entry in Part (a) for a $50 gift card sale during the year
ended March 3, 2012.
Guidance:
(1) Determine the appropriate line item(s) affected using Best Buy’s statements. For example, write “cash
and cash equivalents” rather than “cash” because this is on Best Buy’s balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for events affecting income.
Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example, don’t report “net earnings” on the income statement. However, net earnings is NOT a total on the statement of shareholders’
equity.
(4) Three lines were included below for each statement, but you may need none or more than one line.
Write “NONE” if no line item is effected on the statement.
(5) Indicate if the effect(s) of the entries associated with the above event increased or decreased the line
item. Put an X in the appropriate column if the above event increases or decreases that line item. For
full credit, be sure to mark only one box in each statement’s row. NOTE: If a reported negative number
changes from -2 to -3, it decreases; if it changes from - 2 to - 1, it increases.
Balance Sheets
Statements of Changes in Shareholders' Equity
Line Items
Increases
Decreases
Increases
Decreases
Line Items
Increases
Statements of Earnings
Line Items
(c) Record Best Buy’s journal entry that combines the entries Best Buy recorded during the year ended March 3,
2012 to recognize gift card breakage income. Write your journal entry in the space provided below using the
most appropriate accounts from the list on page 6.
Note: Four rows have been provided, but you may not need them all.
Recognize gift card breakage income for fiscal 2012
Debit
Credit
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Decreases
3
EXERCISE
(d) Determine the direct effect(s) on the following Best Buy metrics, everything else equal (ignore taxes) from
recognizing breakage income during fiscal 2012.
Guidance:
Include the direct affects, including the effect(s) of closing entries for events affecting income. Put an “X” in
the appropriate box.
Increases
Decreases
No Effect
Working capital (current assets - current liabilities)
Financial leverage (liabilities / assets)
Return on equity (ROE) (net profit / average owners' equity)
Relevant information for parts (e)-(g)
Base your responses to parts (e)-(g) on Best Buy’s financial statements; the following excerpts from Best Buy’s
Summary of Significant Accounting Policies footnote (Best Buy’s 2011 10K, Page 76); definitions below; and the
specific event description and assumptions described below.
Summary of Significant Accounting Policies footnote excerpts
Accrued Liabilities
The major components of accrued liabilities at March 3, 2012 , and February 26, 2011, were deferred revenue,
state and local tax liabilities, rent-related liabilities including accrued real estate taxes, loyalty program liabilities and self-insurance reserves.
Revenue Recognition
We sell extended warranties and other service contracts that typically have terms ranging from three months
to four years. We also receive commissions for customer subscriptions with various third parties, notably
from mobile phone network operators. In instances where we are deemed to be the obligor on the service
contract or subscription, the service and commission revenue is deferred and recognized ratably over the term
of the service contract or subscription period.
Definitions
Obligor
The party that is obligated to perform.
Deferred and recognized ratably over a service period
This means the fraction of the total deferred revenue recognized during a period is the same as the fraction
of the total services delivered during the period. For example, if the same level of service is expected to be
delivered each year for a five-year contract, 20% of the revenue is recognized each year.
Event Description and Assumptions for parts (e)-(g)
■ On the last day of fiscal 2012, March 3, 2012, Best Buy sells a television and a two-year service contract to
a customer for $450 cash. The customer pays $400 for the television and $50 for the service contract.
■ The service is expected to be delivered evenly over the two-year contract.
■ Assume for the purpose of this question, when Best Buy sells a multi-year service contract, it records obligations expected to be met within one year in a different account than those expected to be met thereafter.
■ Assume for the purpose of this question, the cost of the television is $300.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
4
NAVIGATING ACCOUNTING®
(e) Record Best Buy’s journal entry to record the $450 of cash collected from the customer on March 3, 2012 as
described on the prior page. Do NOT account for the cost of the television in this entry. Write your journal
entry in the space provided below using the most appropriate accounts from the list on page 6.
Note: Four rows have been provided, but you may not need them all.
Recognize sale of $400 TV and $50 service contract
Debit
Credit
(f) Record Best Buy’s journal entry to record the $300 cost of the sold television as described on the prior page.
Do NOT account for the cash collected from the customer. Write your journal entry in the space provided
below using the most appropriate accounts from the list on page 6.
Note: Four rows have been provided, but you may not need them all.
Recognize $300 cost of sold TV
Debit
Credit
(g) Identify the Best Buy financial statement line items that would have been directly affected (and the direction
of the effects) if Best Buy had recorded the journal entries in part (e) AND (f). Thus, you are to identify the
combined effects of the entries to record the $450 of cash collected from the customer and the $300 cost of
the television. Follow the guidance given in part (b).
Balance Sheets
Line Items
Statements of Changes in Shareholders' Equity
Increases
Decreases
Increases
Decreases
Line Items
Increases
Decreases
Statements of Earnings
Line Items
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
5
EXERCISE
Relevant information for parts (h)-(i)
Base your responses to parts (h)-(i) on Best Buy’s financial statements; the following excerpt from Best Buy’s
Summary of Significant Accounting Policies footnote (Best Buy’s 2011 10K, Page 71) and the definitions below.
Summary of Significant Accounting Policies footnote excerpt
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations. We test goodwill for impairment annually in the fiscal fourth quarter, or when indications
of potential impairment exist. We monitor the existence of potential impairment indicators throughout the
fiscal year.
(A paragraph not relevant to question 5 was omitted here.)
The impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of
the reporting unit. If the fair value exceeds carrying value, then we conclude that no goodwill impairment
has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to
measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and
intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business
combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value
of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the
goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
Definitions
Carrying value
The amount reported on the balance sheet.
Impairing an asset
Decreasing its carrying value.
Impairment loss
The amount the carrying value is decreased when an asset is impaired.
(h) Record Best Buy’s journal entry that combines the entries Best Buy recorded during the year ended March
3, 2012 to recognize goodwill impairment. Write your journal entry in the space provided below using the
most appropriate accounts from the list on page 6.
Note: Four rows have been provided, but you may not need them all
Recognize goodwill impairment
Debit
Credit
(i) Determine the direct effect(s) on the following Best Buy metrics, everything else equal (ignore taxes) from
recognizing goodwill impairment during fiscal 2012. Follow the guidance in part (d).
Increases
Profit margin (pretax profit/revenues)
Asset turnover (revenues / average assets)
Gross margin ((revenues - cost of sales) / revenues)
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Decreases
No Effect
6
NAVIGATING ACCOUNTING®
ASSETS
Current
AR
C
Inv
PrEx
Stin
Chart of Accounts
Accounts receivable
Cash
Inventories
Prepaid expenses
Short-term investments
Noncurrent
Property, plant, and equipment
HcPPE PP&E historical cost
AcDep PP&E accumulated depreciation
Eqinv Equity and other investments
Goodwill
Gdw
Tmks Trademarks, net
LIABILITIES
Current
Accm
AcL
AP
DP
STD
UGC
Accrued compensation and related expenses
Accrued liabilities
Accounts payable
Dividends payable
Short-term debt
Unredeemed gift card liabilities
Noncurrent
Long-term debt
LTD
OLTL Other long-term liabilities
OWNERS' EQUITY
Permanent
AOCI
APIC
CS
NCI
RE
Accumulated other comprehensive income
Additional paid-in capital
Common stock
Noncontrolling interest
Retained earnings
Net income
Cgs
DepEx
Gppe
Ginvs
Gimp
IncS
Intinc
Res
Rev
SG&A
Cost of goods sold
Depreciation expense
Gain on sale of PP&E
Gain on sale of investments
Goodwill impairment
Income summary
Interest income
Restructuring charge
Revenues, net
Selling, general, and administrative expense
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
7
EXERCISE
BEST BUY CO INC
Consolidated Balance Sheets
March 3,
2012
$ in millions, except per share amounts
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Receivables
Merchandise inventories
Other current assets
Total current assets
Property and Equipment
Land and buildings
Leasehold improvements
Fixtures and equipment
Property under capital lease
$1,199
2,288
5,731
1,079
10,297
Less accumulated depreciation
Net property and equipment
Goodwill
Tradenames, Net
Customer Relationships, Net
Equity and Other Investments
Other Assets
Total Assets
Liabilities and Equity
Current Liabilities
Accounts payable
Unredeemed gift card liabilities
Accrued compensation and related expenses
Accrued liabilities
Accrued income taxes
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-Term Liabilities
Long-Term Debt
Contingencies and Commitments (Note 15)
Equity
Best Buy Co., Inc. Shareholders' Equity
Preferred stock, $1.00 par value: Authorized none
Common stock, $0.10 par value: Authorized shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total Best Buy Co., Inc. shareholders' equity
Noncontrolling interests
Total equity
Total Liabilities and Equity
See Notes to Consolidated Financial Statements
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
-
February 26,
2011
$1,103
22
2,348
5,897
1,103
10,473
775
2,367
4,981
129
8,252
4,781
3,471
1,335
130
229
140
403
$16,005
766
2,318
4,701
120
7,905
4,082
3,823
2,454
133
203
328
435
$17,849
$5,364
456
539
1,685
288
480
43
8,855
1,099
1,685
$4,894
474
570
1,471
256
557
441
8,663
1,183
711
34
3,621
90
3,745
621
4,366
$16,005
-
39
18
6,372
173
6,602
690
7,292
$17,849
-
Best Buy's 2012 10K, Page 64
8
NAVIGATING ACCOUNTING®
BEST BUY CO INC
Consolidated Statement of Earnings
$ in millions, except per share amounts
Fiscal Years Ended
Revenue
Cost of goods sold
Restructuring charges cost of goods sold
Gross profit
Selling, general and administrative expenses
Restructuring charges
Goodwill impairment
Operating income
Other income (expense)
Gain on sale of investments
Investment income and other
Interest expense
Earnings from continuing operations before income tax expense and equity in
(loss) income of affiliates
Income tax expense
Equity in (loss) income of affiliates
Net earnings from continuing operations
Loss from discontinued operations (Note 3), net of tax of $89, $65 and $33
Net earnings including noncontrolling interests
Net (earnings) from continuing operations attributable to noncontrolling interests
Net loss from discontinued operations attributable to noncontrolling interests
Net (loss) earnings attributable to Best Buy Co., Inc.
March 3,
2012
February 26,
2011
February 27,
2010
$50,705
38,113
19
12,573
10,242
39
1,207
1,085
$49,747
37,197
9
12,541
10,029
138
$49,243
37,201
2,374
2,368
12,042
9,622
52
55
37
(134)
43
(86)
53
(92)
1,043
709
(4)
330
(308)
22
(1,387)
134
($1,231)
2,331
779
2
1,554
(188)
1,366
(127)
38
$1,277
2,329
835
1
1,495
(101)
1,394
(96)
19
$1,317
Basic (loss) earnings per share attributable to Best Buy Co., Inc.
Continuing operations
Discontinued operations
Basic (loss) earnings per share
($2.89)
(0.47)
($3.36)
$3.51
(0.37)
$3.14
$3.36
(0.20)
$3.16
Diluted (loss) earnings per share attributable to Best Buy Co., Inc.
Continuing operations
Discontinued operations
Diluted (loss) earnings per share
($2.89)
(0.47)
($3.36)
$3.44
(0.36)
$3.08
$3.29
(0.19)
$3.10
366.3
366.3
406.1
416.5
416.8
427.5
Weighted-average common shares outstanding (in millions)
Basic
Diluted
See Notes to Consolidated Financial Statements
Best Buy's 2012 10K, Page 65
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
9
EXERCISE
BEST BUY CO INC
Consolidated Statement of Changes in Shareholders' Equity
$ and shares in millions
Balances at February 28, 2009
Net earnings
Other comprehensive income, net of tax
Foreign currency translation adjustments
Unrealized gains on available-for-sale securities
Total comprehensive income
Purchase accounting adjustments
Stock options exercised
Common Common
Shares
Stock
$414
$41
Retained
Earnings
$4,714
1,317
Accumulated
Other
Comprehensive
(Loss) Income
($317)
329
28
4
1
Tax loss from stock options, restricted stock and
employee stock purchase plan
Issuance of common stock under employee stock
purchase plan
Stock-based compensation
Common stock dividends, $0.56 per share
Balances at February 27, 2010
Net earnings
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Unrealized gains on available-for-sale securities
Cash flow hedging instruments-unrealized loss
Total comprehensive income
Stock options exercised
Vesting of restricted stock
1
419
42
(32)
393
(19)
42
118
(234)
6,320
1,277
42
118
(234)
6,964
1,366
441
Total comprehensive (loss) income
Payment to noncontrolling interest
Dividend distribution
Stock options exercised
45
121
(3)
39
1
Tax loss from stock options, restricted stock and
employee stock purchase plan
2
(55)
$341
See Notes to Consolidated Financial Statements
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
(5)
$34
153
(22)
405
28
1,827
(22)
96
(19)
(234)
5,797
1,277
40
134
1
76
Total
Equity
$5,156
1,394
(19)
3
Issuance of common stock under employee stock
purchase plan
Stock-based compensation
Common stock dividends, $0.58 per share
Repurchase of common stock
Balances at February 26, 2011
Net (loss) earnings
Other comprehensive loss, net of tax:
Foreign currency translation adjustments
Unrealized losses on available-for-sale securities
Reclassification adjustment for gain on
available-for-sale securities included in net earnings
329
28
1,674
Non
controlling
Interests
$513
77
96
76
58
(1)
4
1
Total Best
Buy Co., Inc.
Shareholders'
Equity
$4,643
1,317
95
42
118
Tax benefits from stock options, restricted stock
and employee stock purchase plan
Issuance of common stock under employee stock
purchase plan
Stock-based compensation
Common stock dividends, $0.62 per share
Repurchase of common stock
Balances at March 3, 2012
Additional
Paid-In
Capital
$205
(726)
18
76
58
(1)
1,410
134
644
89
(42)
(1)
46
3
(238)
(464)
6,372
(1,231)
173
45
121
(238)
(1,193)
6,602
(1,231)
(9)
(26)
(9)
(26)
(48)
(48)
(1,314)
34
58
(2)
1,456
134
3
690
1,253
(12)
1,241
(1,303)
(7)
45
121
(238)
(1,193)
7,292
22
(21)
(26)
(48)
(73)
(1,303)
(7)
27
27
27
(2)
(2)
(2)
40
120
40
120
(228)
(1,500)
$3,745
40
120
(228)
(1,500)
$4,366
(203)
(228)
(1,292)
$3,621
$90
$621
Best Buy's 2012 10K, Page 67