Question

The following facts relate to gift cards sold by Sunbru Coffee Company during 2018. Sunbru’s fiscal year ends on December 31.

(a.) In October 2018, sold $3,500 of gift cards, and redeemed $550 of those gift cards.

(b.) In November 2018, sold $4,500 of gift cards, and redeemed $1,450 of October gift cards and $750 of November gift cards.

(c.) In December 2018, sold $3,500 of gift cards, and redeemed $250 of October gift cards, $2,500 of November gift cards, and $450 of December gift cards.

(d.) Sunbru views a gift card to be “broken” (with a remote probability of redemption) two months after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July would be viewed as broken as of September 30.

Required:
1. Prepare all journal entries appropriate to be recorded only during the month of December 2018 relevant to gift card sales, gift card redemptions, and gift card breakage.
2. Determine the balance of the deferred revenue liability to be reported in the December 31, 2018, balance sheet. Prepare the relevant T-account information to support your answer.

Answer 1

	Sold in the mth.	Oct	Nov	Dec	Unredeemed at end of Dec
Oct	3500	550	1450	250	1250	Broken
Nov	4500		750	2500	1250
Dec	3500			450	3050
Total	11500	550	2200	3200	5550

1.. Dec. 2018 Journal Entries
Sale of gift card
Cash	3500
Deferred revenue liability		3500
Redemptions
Deferred revenue liability(250+2500+450)	3200
Revenue		3200
Breakage
Deferred revenue liability(Oct.)	1250
Revenue		1250

Deferred revenue Liability a/c
	Debit	Credit
Sale of Oct. gift cards		3500
Redeemed in Oct	550
Sale of Nov. gift cards		4500
Redeemed in Nov.(1450+750)	2200
Sale of Dec. gift cards		3500
Redeemed in Dec.(250+2500+450)	3200
Broken (Oct. unredeemed gift card	1250
Closing balance	4300
	11500	11500
2. Balance of the deferred revenue liability to be reported in the December 31, 2018		4300
		(Credit)