The following facts relate to gift cards sold by Sunbru Coff

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.

Solution

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)