Question

Bavarian Bar and Grill opened for business in November 2018. During its first two months of operation, the restaurant sold gift certificates in various amounts totaling $6,800, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 90% of gift certificates are redeemed within one year. Certificates totaling $2,100 were presented for redemption during 2018 for meals having a total price of $2,500. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift certificates) are purchased. Sales taxes will be remitted in January. Required: 1. Prepare the appropriate journal entries (in summary form) for the gift certificates sold during 2018 (keeping in mind that, in actuality, each sale of a gift certificate or a meal would be recorded individually). 2. Determine the liability for gift certificates to be reported on the December 31, 2018, balance sheet. 3. What is the appropriate amount for each classification (current or noncurrent) of the liabilities at December 31, 2018

Answer 1

Answer:

1)

Sale of gift cards

Debit Bank $6,800 Credit Gift Card Certificate liability $6,800

Redemption of cards

Debit Gift card liability $2,100 Debit Bank $500 Credit Revenue $2,500 Credit sales tax payable 100

2) Liability to be reported in balance sheet = ( 6800-2100) = $4,700

3) Non current liabilities

Gift Card certificate                               $680

Current Liability

Gift Cards Certificates                              $4,020

Sale tax payable                                       $100

Explanation:

Sales tax payable (2500*4%)  = $100

The bank of $500 in the Redemption of cards journal is a balancing figure.

Classification of the liability in types of liability

Current liability

Gift card certificates sold = 6800

current liability 90%          =6120

deduct redeemed card    = -2100

current liability                  =  $4,020

Non_Current Liabilities

Gift Card not yet redeemed     = 4700

less current gift card liability    = -4020

non current liability                   =680