Question

Apple Inc. is the number one online music retailer through its iTunes music store. Apple sells iTunes gift cards in $15, $25, and $50 increments. Assume Apple sells $21 million in iTunes gift cards in November, and customers redeem $14 million of the gift cards in December.

 

Required:

1. Record the advance collection of $21 million for iTunes gift cards in November.

2. Record the revenue recognized when $14 million in gift cards is redeemed in December.

3. What is the ending balance in the Deferred Revenue account?

Answer 1

Unearned Revenues

Unearned revenue is summarized as follows:

• Unearned revenue is a prepayment made by the individuals before receiving the product or service.

• It is otherwise called as deferred revenue.

• It is a current liability until earned.

• In future, seller will have an obligation to deliver goods or perform the services for the customer.

 

Requirement 1: 

Prepare journal entry to record the advance collection of cash for gift cards.

 

Accounting equation:

The following is the accounting equation for the entry:

                      Assets = Liabilities + Stockholders’ Equity

+$21,000,000(Cash) = +$21,000.000(Unearned Revenue)

 

Journal entry:

Record the following journal entry in the books of A, Inc.:

Date	Accounts and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash (A+)		21,000,000
		Unearned Revenue(L+)		21,000,000
	(To record the collection of cash for unearned revenue)

 

Explanation:

• Cash is an asset account and it increases by $21,000,000. Therefore, debit cash account by $21,000,000.

• Unearned revenue is a liability and it increases by $21,000,000. Therefore, credit unearned revenue account by $21,000,000.

 

Requirement 2: 

Prepare journal entry to record the revenue earned when $14 million in gift cards is redeemed.

Accounting equation:

The following is the accounting equation for the entry:

Assets = Liabilities + Stockholders’ Equity

           = $14,000,000(Unearned Revenue) + $14,000,000(Sale Revenue)

 

Journal entry:

Record the following journal entry in the books of A, Inc:

Date	Accounts and Explanation	Post Ref	Debit ($)	Credit ($)
	Unearned Revenue(L–)		14,000,000
		Sales Revenue(E+)		14,000,000
		(To record revenue earned when gift cards are redeemed)

 

Explanation:

• Unearned revenue is a liability and it decreases by $14,000,000. Therefore, debit unearned revenue account by $14,000,000.

• Sales revenue increases the value of equity. Therefore credit sales revenue account by $14,000,000.

 

Requirement 3:

Prepare T-account for unearned revenue account to know the ending balance.

Unearned Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Sales revenue	$14,000,000			Beginning balance	0
					Cash	21,000,000
	Total	14,000,000			Total	21,000,000
					Ending Balance	7,000,000

 

Explanation:

Unearned revenue comes under the liabilities section of the accounting equation; and therefore, a debit decreases unearned revenue account balance and a credit increases unearned revenue account balance.

Hence, the ending balance in the unearned revenue account is $7,000,000.