Question

Escargot Inc. is a 5-star restaurant in Cincinnati. The restaurant sells 500 gift cards during January 2017. Each gift card has a face value of $300. The gift cards never expire, although based on industry experience, Escargot expects that 12% of the balances will never be redeemed. During February 2017, $45,000 of gift cards are redeemed, and in March 2017 another $80,000 is redeemed.

Required:

1.	Prepare journal entries for Escargot’s gift card transactions for January through March.
2.	Assume that at the end of March, due to the popularity of the restaurant, Escargot reduces its estimate of the amount of gift cards that will go unused to 8%. During April, gift cards worth $10,000 are used. Prepare any necessary journal entries.

Answer 1

Month Account Debit Credit

January Cash A/c $150000

To Gift Card Liability $150000

(Being Sale of Gift Cards recorded)

January Gift Card Liability $ 18000

To Breakage income $18000

(Being Estimated value of the unredeemed gift card transferred to breakage income account)

Feb Gift Card Liability $45000

To Sales Revenue $45000

(Being Sales recorded)

March   Gift Card Liability $80000

To Sales Revenue $80000

(Being sales recorded)

April Breakage Income $6000

To Gift Card Liability $6000

(being income reversed and liability created due to the revision of estimate)

April  Gift Card Liability $10000

  To Sales Revenue $10000

(Being sales recorded)

April Gift Card Liability $ 3000

To Breakage income $3000

(Being value of the unredeemed gift card transferred to breakage income account)