Question

In January, 2018, ABC sells a gift card for $50 and receives cash. In February, 2018, the customer comes back and spends $20 of their gift card on a water bottle. What would be the appropriate journal entry for the purchase of the water bottle?
A. Debit Deferred Revenue, $50; credit Sales Revenue, $50.
B. No journal entry is necessary.
C. Debit Sales Revenue, $20; credit Deferred Revenue, $20.
D. Debit Deferred Revenue, $20; credit Sales Revenue, $20.

Answer 1

Answer:

D. Debit Deferred Revenue, $20; credit Sales Revenue, $20.

Explanation:

Deferred revenue is a liability  that represents revenue related to products that are owed to a customer but is yet to be earned.

In January, 2018, when selling the gift card, the company should have credited $50 to deferred revenue.

In February, 2018, the customer spends a fraction of the deferred revenue, so $20 should be debited to deferred revenue while the value of the purchase should be credited to sales revenue.

Therefore, the answer is D. Debit Deferred Revenue, $20; credit Sales Revenue, $20.