Question

Walmart’s 2020 annual report said the following about its gift card sales: “Customer purchases of gift cards are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card.” When a customer redeems a previously purchased gift card, what impact does this transaction have on Walmart's financial statements?

A. Deferred gift card revenue decreases and cash decreases

B. Deferred gift card revenue increases and revenue decreases

C. Deferred gift card revenue decreases and revenue increases

D. Deferred gift card revenue decreases and cash decreases

E. Deferred gift card revenue increases and cash increases

Answer 1

The correct answer for the question is Option C - Deferred gift card revenue decreases and revenue increases. When a gift card is sold, the company would debit the cash for the amount received and credit Deferred Gift card revenue as it is a liability for the company . Similarly, when a customer actually redeems the previously purchased gift card, the company would record a revenue for the amount of the sale. Hence, there would be a decrease in the deferred gift card revenue when there is an actual sale with a subsequent increase in the revenue.

Option A, Option D and Option E is incorrect as there is no inflow/outflow of cash when there is an actual redemption of purchased gift card.

Option B is incorrect as the actual effect of the redemption of gift card would result in an increase of revenue with a subsequent decrease in deferred gift card revenue.

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