Question

CircuitTown commenced a gift card program in January 2018 and sold $10,000 of gift cards in January, $15,000 in February, and $16,000 in March of 2018 before discontinuing further gift card sales. During 2018, gift card redemptions were $6,000 for the January gift cards sold, $4,500 for the February cards, and $4,000 for the March cards. CircuitTown considers gift cards to be “broken” (not redeemable) 10 months after sale.
  
Required:
1. How much revenue will CircuitTown recognize with respect to January gift card sales during 2018?
2. Prepare journal entries to record the sale of January gift cards, redemption of gift cards (ignore sales tax), and breakage (expiration) of gift cards.
3. How much revenue will CircuitTown recognize with respect to March gift card sales during 2018?
4. What liability for deferred revenue associated with gift card sales would CircuitTown show as of December 31, 2018?

Answer 1

Solution 1:

The entire $10,000 gift card sold in January will be recognized as revenue during 2018. $6,000 because of gift card redemption and $4,000 because of gift card breakage.

Solution 2:

Journal Entries - Circuit Town
Event	Particulars	Debit	Credit
1	Cash Dr	$10,000.00
	To Unearned Gift Card Revenue		$10,000.00
	(To record sale of gift card)
2	Unearned Gift Card revenue Dr	$6,000.00
	To Revenue - Gift Cards		$6,000.00
	(To record gift card redemption)
3	Unearned Gift Card revenue Dr	$4,000.00
	To Revenue - Gift Cards		$4,000.00
	(To record gift card breakage)

Solution 3:

Of the $16,000 gift card sold in March, $4,000 will be recognized as revenue because of gift card redemption. The remaining $12,000 of sales are not recognized as revenue in 2018 because gift cards sold in March of 2018 won't start expiring until January 2019.

Solution 4:

The only liability at December 31, 2018 would be the $12,000 of unexpired March gift cards.