Max Value Store's

1.

A)

Max Value Stores appropriately record sales of other retailers’ gift cards on their income statement. Due to the nature of the agreement, Max Value Stores is not responsible for any future action after the gift card is sold. Gift cards of other retail stores are only redeemable at their respective retail outlets therefore those gift cards are essentially considered inventory for Max Value Stores. Usually, gift cards would be recorded as a portion of current and long term liability depending on the redemption schedule used. However, Max Value Stores should not record the gift cards of other retail stores as a liability because they are not redeemable at Max Value retail outlets. $50 million in sales and $42.5 million in cost of goods sold is similar to any regular business entry where inventory is sold.

It is necessary to divulge as much information as possible in the financial statements to minimize the risk of audit and to provide investors with the clearest and most favorable picture of the firm. The financial statements help investors make decisions and a large sales figure is a good indicator of a strong company. Additionally, cost of goods sold is a direct reduction of taxes therefore if the net sum was recorded, it may increase taxes paid because of the lack of tax shield provided by the cost of goods sold account.

B)

Max Value Store’s financial reporting of the Thanksgiving week restricted gift cards adheres to the currently established GAAP. According to FASB code 605-50-25-3, “For a sales incentive offered voluntarily by a vendor and without charge to customers that can be used or that becomes exercisable by a customer as a result of a single exchange transaction, and that will not result in a loss on the sale of a product or service, a vendor shall recognize the cost of such a sales incentive at the later of the following:

a. The date at which the related revenue is recognized by the vendor

b. The date at which the sales incentive is offered (which would be the case when the sales incentive offer is made after the vendor has recognized revenue; for example, when a manufacturer issues coupons offering discounts on a product that it already has sold to retailers).”

Therefore, Max Value Stores was correct in recording the cost of the sales incentive, or in this case the gift cards, as a reduction in sales. Additionally, since sales were reduced by the cost of the gift cards promotion, an adjusting entry should be made to close out the allowance account. The adjusting entry should reapply the balance in the allowance account to sales because the initial reduction was from the sales account.

C)

Max Value Store’s current established policy for gift card breakage can be remediated to more properly reflect