Question

Maffett Ticket Brokers is a reseller of tickets to sporting events and concerts. During 2019, Maffett sold gift cards totaling $250,000. Based on past experience, Maffett expects that 1% of the gift card purchases will not be redeemed by the time they expire, five years after issuance. During 2019, $150,000 of the gift card purchases from 2019 were used to purchase tickets that had cost Maffett $90,000. Required: Prepare the journal entry Maffett uses to record its activity related to the above transactions in 2019, assuming state law does not require Maffett to remit the breakage to the state. Prepare the journal entry Maffett uses to record its activity related to the above transactions in 2019, assuming state law requires Maffett to remit the breakage to the state upon expiration of a gift card.

Answer 1

(A) Journal entries to record activities related to transactions in 2019, assuming state law does not require to remit the breakage to the state:

Particulars	Debit ($)	Credit ($)
Gift Card liability	151515
To Sales Revenue		150000
To Breakage Revenue (W.N)		1515
(Being sales and Breakage Revenue Recorded)
Cost of Goods Sold	90000
To Inventory		90000
(Being Cost of goods sold recorded)

Working Note (W.N):

Given 1% of the gift card purchases will not be redeemed by the time they expire.

Gift card Purchases used = $150000

Expected Gift cards use = $250000 * (100%-1%)

                                           = $250000 * 99%

                                           = $247500

Gift cards used = gift card purchases used / Expected gift cards use

                            = $150000/$247500

                            = 60.61%

Breakage Revenue = $ 250000*1% *60.61%

                                  = 1515.25 (or) 1515 (rounded off)

(B) Journal entries to record activities related to transactions in 2019, assuming state law requires to remit the breakage to the state:

Particulars	Debit ($)	Credit ($)
Gift Card liability	150000
To Sales Revenue		150000
(Being sales Recorded)
Cost of Goods Sold	90000
To Inventory		90000
(Being Cost of goods sold recorded)

where the state law requires to remit the breakage revenue the same shall not be recognised in the books.