Question

OK Corporation sells gift cards in various denominations. The company likes to sell these cards because cash is collected immediately, but a certain percentage will never be redeemed for merchandise. On December 1, Year One, OK reported a balance in unearned revenue of $728,000 from the sale of gift cards. a. During December, OK sold an additional $578,000 in gift cards. Prepare this journal entry. b. During December, gift cards totaling $327,000 were redeemed to purchase inventory that had originally cost OK $190,000. Prepare these journal entries. Assume OK uses a perpetual inventory system. c. On December 31, OK’s accountant determines that 3 percent of the outstanding gift cards will never be redeemed because they have expired. Prepare a journal entry if necessary. d. What is the amount reported by OK on its December 31, Year One, balance sheet for unearned revenues?

Answer 1

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a.

Accounts	Dr	Cr
Cash	5,78,000
Unearned Revenue		5,78,000

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b.

Accounts	Dr	Cr
Unearned Revenue	3,27,000
Sales Revenue		3,27,000
Cost of Goods Sold	1,90,000
Merchandise Inventory		1,90,000

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c.

Accounts	Dr	Cr
Unearned Revenue $ ( 728,000 + 578,000 - 327,000) x 3%	29,370
Sales Revenue		29,370

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d.

The answer for the fourth question is $949,630

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Hope that helps.

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