Question

Target Case (Static) [LO6-2, 6-6, 6-7]

Target Corporation prepares its financial statements according to U.S. GAAP. Target’s financial statements and disclosure notes for the year ended February 3, 2018, are available here. This material also is available under the Investor Relations link at the company’s website (www.target.com).

Required:
1. On what line of Target’s income statement is revenue reported? What was the amount of revenue Target reported for the fiscal year ended February 3, 2018?



2. Disclosure Note 2 indicates that Target generally records revenue in retail stores at the point of sale. Does that suggest that Target generally records revenue at a point in time or over a period of time? Explain.



3. Disclosure Note 2 indicates that customers (“guests”) can return some merchandise within 90 days of purchase and can return other merchandise within a year of purchase. How is Target’s revenue and net income affected by returns, given that it does not know at the time a sale is made which items will be returned?



4. Disclosure Note 2 indicates that “Commissions earned on sales generated by leased departments are included within sales and were $44 million . . . in 2017.” Do you think it likely that Target is accounting for those sales as a principal or an agent? Explain.



5. Disclosure Note 2 discusses Target’s accounting for gift card sales. Does Target recognize revenue when it sells a gift card to a customer? If not, when does it recognize revenue? Explain.



6. Disclosure Note 4 discussed how Target accounts for consideration received from vendors, which they call “vendor income.” Does that consideration produce revenue for Target? Does that consideration produce revenue for Target’s vendors? Explain.

Answer 1

Source of report : https://corporate.target.com/annual-reports/2018/download/pdf?parts=part6

1. On what line of Target’s income statement is revenue reported? What was the amount of revenue Target reported for the fiscal year ended February 3, 2018?

Ans : In the first line of income statement revenue is reported. FY18 total revenue had been 75,356M which included other revenue of 923M

2. Disclosure Note 2 indicates that Target generally records revenue in retail stores at the point of sale. Does that suggest that Target generally records revenue at a point in time or over a period of time? Explain.

Target generally records revenue at a point in time since the Target is engaged into business of sales of merchandise item where performance obligation is sales of goods which arises typically point in time and not over a period of time.

3. Disclosure Note 2 indicates that customers (“guests”) can return some merchandise within 90 days of purchase and can return other merchandise within a year of purchase. How is Target’s revenue and net income affected by returns, given that it does not know at the time a sale is made which items will be returned?

In line of IFRS15 guidance the entity have to make best estimate of probable return and to that extent revenue may not be recognized, refund liability for money received should be created and also cost of sales should also be adjusted for right to take return the goods for refund to be made. Once relevant period is over i.e. 90 days or 365 days Target should reverse the balance values.


4. Disclosure Note 2 indicates that “Commissions earned on sales generated by leased departments are included within sales and were $44 million . . . in 2017.” Do you think it likely that Target is accounting for those sales as a principal or an agent? Explain.

I am unable to find relevant portion of note hence unable to comment on this. The note 3 of consolidated revenue talks about arrangement with vendors but nothing like commission earned on sales generated. I searched entire 10K of 2018 but couldn't find this.

5. Disclosure Note 2 discusses Target’s accounting for gift card sales. Does Target recognize revenue when it sells a gift card to a customer? If not, when does it recognize revenue? Explain.

Ans : Gift card revenue is not recognized on sell of gift card but on redemption. When customer buys gift card, no performance obligation is fulfilled in fact contract liability is generated and contract liability will get fulfilled when gift card redemption happens hence at that time revenue needs to be recognized.

6. Disclosure Note 4 discussed how Target accounts for consideration received from vendors, which they call “vendor income.” Does that consideration produce revenue for Target? Does that consideration produce revenue for Target’s vendors? Explain.

Target receives consideration from vendor in various forms such as volume rebate, promotion, advertising allowance etc. This arises due to procurement activity and hence it is accounted as a part of cost of goods sold. The vendor income is actually performance obligation for vendor hence it wont be their income.