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Accounting for Gift Cards Assume Ikeo Inc. sold $160,000 of gift cards during the last two weeks...

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Accounting

Accounting for Gift Cards

Assume Ikeo Inc. sold $160,000 of gift cards during the last twoweeks of December 2020. No gift cards were redeemed in 2020, while$144,000 of the gift cards were redeemed for store purchases during2021. On December 31, 2021, Ikeo Inc. calculates the remainingbalance of unredeemed gift cards of $16,000 ($160,000 less$144,000). Based on previous experiences, Ikeo estimates gift cardbreakage to be 5% of total gift card sales. Ikeo uses theproportional method to recognize income on gift card breakage.

Required

a. Record the sale of gift cards in 2020.

b. Record the redemption of gift cards in 2021.

c. Record revenue in 2021 due to gift card breakage using theproportional method.

Answer & Explanation Solved by verified expert
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ANSWER

Date Account title Debit Credit
A Cash            160,000
Gift card liability           160,000
To record sale of the gift cards.
B Gift card liability            144,000
Gift card revenue           144,000
To record redemption of the gift cards.
C Gift card liability              7,579
Breakage revenue             7,579
To record breakage revenue. (8,000*(144,000 /152,000))
Gift card liability    160,000
Total breakage (160,000 *5%) 8,000
Estimated revenue redeemed 152,000

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