Question

CircuitTown commenced a gift card program in January 2021 and sold $10,000 of gift cards in January, $15,000 in February, and $16,000 in March of 2018 before discontinuing further gift card sales. During 2018, gift card redemptions were $6,000 for the January gift cards sold, $4,500 for the February cards, and $4,000 for the March cards. CircuitTown considers gift cards to be "broken" (not redeemable) 10 months after sale.
Required:
a. How much revenue will CircuitTown recognize with respect to January gift card sales during 2018?
b. Prepare journal entries to record the sale of January gift cards, redemption of gift cards (ignore sales tax), and breakage (expiration) of gift cards.
c. How much revenue will CircuitTown recognize with respect to March gift card sales during 2018?
d. What liability for deferred revenue associated with gift card sales would CircuitTown show as of December 31, 2018?

Answer 1

Answer and Explanation:

a. The computation of revenue is shown below:-

Revenue = Gift card redemption + Gift card breakage

= $6,000 + $4,000

= $10,000

b. The Journal entry is shown below:-

Cash Dr, $10,000  

        To Unearned Gift Card Revenue $10,000

(Being sale of the gift card is recorded)  

2 Unearned Gift Card revenue Dr, $6,000  

        To Revenue - Gift Cards $6,000

(Being gift card redemption is recorded)  

3. Unearned Gift Card revenue Dr, $4,000  

        To Revenue - Gift Cards $4,000

(Being gift card breakage is recorded)  

c. The revenue is shown below:-

Only $4,000 will be recognized as revenue as it is the gift card redemption.

d. The computation of liability for deferred revenue is shown below:-

Liability for deferred revenue = $16,000 - $4,000

= $12,000