Question

11. Go to the Notes to Financial Statements for Lowes and find the “Summary of Significant Accounting Policies." What do they say about accounting for gift card sales (hint: find Revenue Recognition)? 12. Based off of your answer to 12, record a journal entry for the sale of a $50 gift card and a journal entry when the card is redeemed

Answer 1

11. Revenue Recognition – The Company recognizes revenues,
net of sales tax, when sales transactions occur and customers take
possession of the merchandise. A provision for anticipated merchandise
returns is provided through a reduction of sales and cost of sales in
the period that the related sales are recorded. Revenues from product
installation services are recognized when the installation is completed.
Deferred revenues associated with amounts received for which customers
have not yet taken possession of merchandise or for which installation
has not yet been completed were $371 million and $354 million at
January 28, 2011, and January 29, 2010, respectively.
Revenues from stored-value cards, which include gift cards and
returned merchandise credits, are deferred and recognized when the
cards are redeemed. The liability associated with outstanding stored-
value cards was $336 million and $329 million at January 28, 2011,
and January 29, 2010, respectively, and these amounts are included
in deferred revenue on the consolidated balance sheets. The Company
recognizes income from unredeemed stored-value cards at the point
at which redemption becomes remote. The Company’s stored-value
cards have no expiration date or dormancy fees. Therefore, to determine
when redemption is remote, the Company analyzes an aging of the
unredeemed cards based on the date of last stored-value card use.

12. Journal entry for the sale of $50 gift card.

Companies cannot recognize revenue upon the initial sale of a gift card because of a key revenue recognition principle that states that revenue is recognized when or as an entity satisfies a performance obligation by transferring a promised good or service to a customer.

What does that mean? When your company sells a gift card, cash has been received, but goods or services have yet to be rendered. You should Infinitely Defer this gift revenue in your Deferred Revenue account.

Entry for the sale of $50 gift card

Cash	$50
	Deferred Revenue		$50

You cannotot recognize this revenue until there's a triggered event - namely, providing goods or services when the gift card is redeemed.-- Entry when the card is redeem

The accounting is straightforward; the company recognizes sales revenue and eliminates the liability.

Deferred Revenue	$50
	Sales Revenue		$50