Question

Accounting for Gift Cards

Assume Ikeo Inc. sold $160,000 of gift cards during the last two weeks of December 2020. No gift cards were redeemed in 2020, while $144,000 of the gift cards were redeemed for store purchases during 2021. On December 31, 2021, Ikeo Inc. calculates the remaining balance of unredeemed gift cards of $16,000 ($160,000 less $144,000). Based on previous experiences, Ikeo estimates gift card breakage to be 5% of total gift card sales. Ikeo uses the proportional method to recognize income on gift card breakage.

Required

a. Record the sale of gift cards in 2020.

b. Record the redemption of gift cards in 2021.

c. Record revenue in 2021 due to gift card breakage using the proportional method.

Answer 1

ANSWER

Date	Account title	Debit	Credit
A	Cash	160,000
	Gift card liability		160,000
	To record sale of the gift cards.
B	Gift card liability	144,000
	Gift card revenue		144,000
	To record redemption of the gift cards.
C	Gift card liability	7,579
	Breakage revenue		7,579
	To record breakage revenue. (8,000*(144,000 /152,000))

Gift card liability	160,000
Total breakage (160,000 *5%)	8,000
Estimated revenue redeemed	152,000

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