Question

the show time movie theatre sells thousands of gift certificates every year. The certificates can be redeemed at any time because they have no expiry date. Some of them may never be redeemed (because they are lost or forgotten for example). the owner of the theatre has raised some questions about the accounting for these gift certificates.

write an email to answer the following questions from the owner:

a) why is a liability recorded when these certificates are sold? After all, they bring customers into the theatre, where they spend money on snacks and drinks. Why should something that helps generate additional revenue be treated as a liability?

b) how should the gift certificates that are never redeemed be treated? At some point in the future, can the liability related to them be eliminated? If so, what type of journal entry would be made?

Answer 1

a) The liability of the gift certificates sold by the Show Time movie theatre should be recorded because all the revenues and expense of the gift certificates are booked in the year in which they are incurred, but the actual redemption of the gift certificates would be somewhere in the future. These certificates are issued to be spent on the snacks and drinks and these gift certificates has no expiry date, but whenever they are used in the future there would not be any revenue towards the expense on certificates redemption. The liability recognition journal entry would be:

Debit , "The Gift Certificate Expense" and Credit, "The Gift Certificates Liability" with the certificates total amount.

b) The gift certificates which are never redeemed should be written-off and Journal Entry has to be passed as:

Debit , “The Gift Certificates Liability” and Credit, “Gain on writing off the Gift Certificates” with the amount of written-off gift certificates.

Whenever in the future, if the liability related to the Gift Certificates has to eliminated, then the above mentioned Journal Entry should be passed.