Question

Suppose that Robert Jones purchases a $100 gift card at Best Buy on December 24, 2013, and gives it to his wife, Mary Jones, on December 25, 2013. On January 3, 2014, Mary uses the card to purchase $100 worth of CDs. When do you think Best Buy should recognize revenue and why?

Answer 1

Best Buy should recognize revenue when Mary uses the gift card to purchase the CDs on January 3, 2014.

Step-by-step explanation:

Best Buy should recognize revenue when Mary uses the gift card to purchase the CDs on January 3, 2014.

According to the revenue recognition principle, revenue should be recognized when it is earned and realizable. In this case, Best Buy earns the revenue when Mary uses the gift card to make a purchase.

Prior to Mary using the gift card, Best Buy has received payment from Robert Jones for the gift card. However, at that point, the revenue is not earned as the goods or services have not been provided. Therefore, revenue recognition should occur when the CDs are purchased and Mary receives the goods.