Question

In: Accounting

A restaurant collects cash from customers for gift certificates. Assuming that 100% of the gift certificates...

A restaurant collects cash from customers for gift certificates. Assuming that 100% of the gift certificates are redeemed, the restaurant records the collection of the cash and the delivery of food to customers who redeem their gift certificates as follows (ignore inventory and COGS):

Select one:

a. Collection: increase cash and increase deferred revenue; and redemption: decrease deferred revenue and increase equity (revenue)

b. None of the listed answers

c. Collection: increase cash and increase deferred revenue; and redemption: decrease deferred revenue and decrease equity (revenue)

d. Collection: increase cash and decrease equity (revenue); and redemption: nothing is recorded

e. Collection: increase cash and increase equity (revenue); and redemption: nothing is recorded

Expert Solution

Ans : (a) Collection: increase cash and increase deferred revenue; and redemption: decrease deferred revenue and increase equity (revenue)

Explanation:

when restuarant sells gift cirtificates for cash, it has an obligation to supply the customer with goods in future and hence need to establish a liability. For example, if a restuarant sell gift cirtificates of $1000, the deferred revenue journal entry to record a sale is as below

Cash A/c Dr 1000

To Gift Cirtificates Liabillity (Deferred Revenue) 1000

Since, the business has received cash, its collection has increased but goods is not provided yet, revenue cannot be recognized. Hence it is recorded in the balance sheet as deferred revenue, which thereby increases the deferred revenue.

When gifts cirtificates are redeemed, the restaurant fulfills its obligation to supply the goods and it liability is extinguished. The journal entry for redemption is as below

Gift Cirtificates Laibility A/c Dr 1000

To revenue A/c 1000

Since the revenue is recognized, the amount of $1000 is now transferred from Gift Cirtificate Liability (Deferred Revenue) in the Balance sheet to the Revenue in the Income Statement. Hene, decreasing the deferred revenue and increase in equity (revenue)

ekkarill92 answered 2 years ago

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