Question

At December 31, 2020, Sandra’s Boutique had 1850 gift certificates outstanding, which had been sold to customers during 2020 for $70 each. Sandra’s operates on a gross profit of 60% of its sales. What amount of revenue pertaining to the 1850 outstanding gift certificates should be deferred at December 31, 2020?

Answer 1

Answer: $129,500

Explanation:

According to the Accrual Basis in Accounting, revenue and expenses should only be recognised when goods have been delivered.

On the December 31, 2020 Sandra's Boutique had 1,850 gift certificates outstanding but these had been sold already to people during the year for $70.

This means that they have been paid for a service that they have not given (they provide the service when the GIFT certificate is renewed).

They cannot therefore recognize the revenue as Revenue yet and have to defer it.

The amount to be Deferred will therefore be,

= 1,850 * $70

= $129,500