Reference no: EM132997885

The following description is in the Significant Accounting Policies footnote in The Home Depot's (HD) most recent annual report, which can be found here.

Stored Value Cards

• Stored value cards can be activated through various channels, including at our company-operated and most licensed store locations, online at Starbucks.com or via mobile devices held by our customers and at certain other third-party websites and locations, such as grocery stores, although they cannot be reloaded at these third-party websites or locations. Amounts loaded onto stored value cards are initially recorded as deferred revenue and recognized as revenue upon redemption. Historically, the majority of stored value cards are redeemed within one year.
• In many of our company-owned markets, including the U.S., our stored value cards do not have an expiration date nor do we charge service fees that cause a decrement to customer balances. Based on historical redemption rates, a portion of stored value cards is not expected to be redeemed and will be recognized as breakage over time in proportion to stored value card redemptions. The redemption rates are based on historical redemption patterns for each market, including the timing and business channel in which the card was activated or reloaded, and remittance to government agencies under unclaimed property laws, if applicable.
• Breakage is recognized as company-operated stores and licensed stores revenue within the consolidated statement of earnings beginning in fiscal 2019 in accordance with the revenue recognition guidance that we adopted prospectively during fiscal 2019. For the fiscal years ended September 27, 2020 and September 29, 2019, we recognized breakage revenue of $130.3 million and $125.1 million in company-operated store revenues and $14.3 million and $15.7 million in licensed store revenues, respectively. Prior to the adoption of the new revenue recognition guidance, breakage was recorded using the remote method and recorded in interest income and other, net. In fiscal 2018, we recognized breakage income of $155.9 million.

Required: Answer each of the following questions

Problem 1: Explain what the highlighted sentence above means for Starbucks' financial statements. What accounts will be affected when Starbucks records breakage?

Problem 2: Does the change of accounting principle adopted in 2019 seem to have affected Starbucks' reporting income, based on the information in this note? Explain the basis for your answer.