Question

In: Accounting

During February, the last month of the fiscal year, Be My Valentine Ltd. sells $20,000 of...

During February, the last month of the fiscal year, Be My Valentine Ltd. sells $20,000 of gift cards. From experience, management estimates that 8% of the gift cards sold will not be redeemed by customers. In March, $2,000 of these cards is redeemed for merchandise with a cost of $500. In April, further $15,000 of these cards is redeemed for merchandise with a cost of $5,000. The company uses a perpetual inventory system.

Also in February, Be My Valentine had $1,000 of unused gift cards that were over one year old and were not expected to be used. The amount was in line with the company's normal breakage and all other gift cards of the same age had been used.

a. Prepare journal entries to record the transactions for February, March, and April.

b. How much income (if any) was earned in each of these months?

c. What liability (if any) would appear on the company's statement of financial position at the end of each of these months?

Solutions

Expert Solution

a. Journal entry.

No -1.

Date. Particular. Debit. Credit

Feb. Cash a/c Dr. $20,000

To Gift Card liability a/c. $20,000

(Being transaction happened for gift card sale)

No-2. Journal entry for 8% not redemption including unused Gift Card.

Date . Particulars. Debit . Credit.

Feb. Unearned revenue a/c Dr. $2,600

To Gift Card breakage revenue a/c . $2,600

No -3. March journal entries.

Date . Particulars . Debit. Credit

March. Gift Card liability a/c Dr. $500

To revenue a/c. $500.  

( gift card transactions being redemption $ 500)

No -4. April journal entries.

Date. Particulars . Debit. Credit.

April. Gift Card liability a/c Dr. $5,000

To revenue a/c. $5,000

(gift card transactions being redemption $5,000)

b.

As per the above journal entry

In the month of March and April, the earned amount is $500 and $5000 respectively.These two months Gift Card revenue get redemption by customer.

C. As we know the business which allow the customer to purchase the gift in future. So there must be liability. So as per the given information each month appeared some amount of liability to the company.

I. In the month of February

The liability would be $18,400.because 8% got breakage including past year $1000 of Gift Card. So generally to avoid the unredeemption amount company saw it as income .

II. In the month of March.

The liability amount got reduce from the month February. The liability amount is $17,900.

III.

In the month of April

The liability amount will be $ 12,900.

ekkarill92 answered 2 years ago
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