Tesco Case Study

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Tesco Case Study Requirement 1 A) Refund Tesco earned for the 12-month period ending August 31, 2014: Tesco earns a refund percentage based off of total purchases within a twelve month period. When determining the refund percentage, anything above 3.7 billion in purchases qualifies for a 10 percent refund, and Tesco had total purchases of 3.75 billion at £2 per unit, which equals £7.5 billion in sales for the period ending August 31, 2014. 10 percent of £7.5 billion would give the company a refund of £750 million. However, the refund was settled with a cash amount of £800 million. i) Compliance with U.S. GAAP for CPC: CPC was incorrect in their treatment of the sales allowance. CPC recognizes the £800 million as a selling, general, and administrative expense. According to FASB article 605-50-25-7 “the vendor shall recognize the rebate or refund obligation as a reduction of revenue based on a systematic and rational allocation of the cost of honoring rebates or refunds earned and claimed to each of the underlying revenue transactions that result in progress by the customer toward earning the rebate or refund” (FASB ASC). CPC being the vendor should have recognized the 800 million as a reduction of the sales revenue earned for the period. ii) Compliance with U.S. GAAP for Tesco: Tesco was also incorrect in their dealing of the refund from a customer’s perspective. Article 605-50-25-10 on “Customer's Accounting for Certain Consideration Received from a Vendor” states that “a rebate or refund of a specified amount of cash consideration… shall be recognized as a reduction of the cost of sales based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions” (FASB ASC). This means that Tesco should not have recorded the £750 million as sales

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