Question

Bavarian Bar and Grill opened for business in November 2021. During its first two months of operation, the restaurant sold gift cards in various amounts totaling $5,200, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 80% of gift cards are redeemed within one year. Gift cards totaling $1,300 were presented for redemption during 2021 for meals having a total price of $2,100. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift cards) are purchased. Sales taxes will be remitted in January. Required: 1. Prepare the appropriate journal entries (in summary form) for the gift cards and meals sold during 2021 (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Determine the liability for gift cards to be reported on the December 31, 2021, balance sheet. 3. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2021

Answer 1

Answer:

1) the journal entry to record the sale of gift cards would be:

Dr Cash 5,200

    Cr Gift cards outstanding 5,200

the journal entry to record the actual sale of meals would be:

Dr Gifts cards outstanding 1,300

Dr Cash 800

    Cr Sales revenue 2,016

    Cr Sales taxes payable 84

2) Gift cards outstanding account balance on December 31, 2021 = $5,200 - $1,300 = $3,900

3) since 20% of the gift cards are expected to be redeemed in more than 1 year, they should be classified as long term liabilities = $5,200 x 20% = $1,040. The remaining balance of the gift cards outstanding account should be classified as current liabilities = $3,900 - $1,040 = $2,860