Question

Bavarian Bar and Grill opened for business in November 2021. During its first two months of operation, the restaurant sold gift cards in various amounts totaling $6,000, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 80% of gift cards are redeemed within one year. Gift cards totaling $1,700 were presented for redemption during 2021 for meals having a total price of $2,100. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift cards) are purchased. Sales taxes will be remitted in January.

Required:
1. Prepare the appropriate journal entries (in summary form) for the gift cards and meals sold during 2021 (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually).
2. Determine the liability for gift cards to be reported on the December 31, 2021, balance sheet.
3. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2021?

Answer 1

solution: Requirement - 1' . Event General Journal.... . . .. 1. cash · Defexred revenue (to record gift cards 5010) Creditle) Debit(s) $6,000 $6,000 2. ... $ 48h $1,700 ..... . $2,100 $84. Gash Deferrea Revenue . . sales Revenue sales taxes payable ($2,100Xul) [to record gift cards sold and sales tax payable) ...

I Requirement - Liability for Gift Cards to be reported on the December 31, 2021 = $6,000 - $1,700 => $4.300 Kequirement-3 - classification of liabilities at bet31120214 $84 A Sales Tax liability - current sales tea licebility - Non current Liability Gift caras - Current Liability Gift Cards -non current Explanations Gift cards sola $6.000 .* 8001. $ 4,800 $(1700) Estimated current Liability. Less: Gift cards. Redeemed .. . . Current Liability at Dec, 31. Ada non current liability at Dec, 31 ($6,000 4201) Total $3,160 $1,200 : $4,300

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