Better Buy, Inc

Abstract

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

Excerpt

UVA-C-2330

Oct. 26, 2011

Better Buy, Inc.

Better Buy, Inc., (BB) was a reputable electronics retailer that had experienced strong and profitable sales growth throughout North America. Much of the company's growth was due to its reputation for providing an outstanding selection of state-of-the-art televisions and other popular electronic products at very competitive prices. In addition, BB's non-commission sales personnel were known for their superior product knowledge and friendly, personal customer service.

Although the majority of the company's television sales had come from the sales of numerous recognized brands, the company also sold a limited variety of high-definition televisions under the Better Buy brand name. One of the least expensive of these Better Buy televisions sold for $ 1,800. This particular television was manufactured for BB by a well-known, quality global manufacturer at a cost of $ 1,200, and BB disclosed the identity of the manufacturer so customers could assume a certain level of quality. Included in the $ 1,800 selling price was a one-year warranty from BB. This warranty arrangement was unique because most retail electronics equipment came with a one-year manufacturer's warranty. But in order to ensure its price-competitive position in the market, BB relieved the manufacturer of any warranty obligation. Thus, the initial one-year warranty on BB televisions was the retailer's responsibility. BB had created an excellent internal service and repair capability that took care of all the initial one-year-warranty service work. Past history, although limited, had shown that these BB televisions were extremely reliable and that only about 5% of them ever needed warranty service within the first year. For those that did, the average repair cost was about $ 1,000 per television, with very few outside the $ 800 to $ 1,200 range.

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Keywords: deferred revenue, unearned, inventory, COGS, cost of goods sold