Question

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Exercise 13-6 (Algo) Gift cards; sales taxes [LO13-3] 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 $8,000, 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 $2,700 were during 2021 for meals having a total price of $3,100. 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 Requlred: 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the gift cards and meals sold during 2021. Note: Enter debits before credits Event General Journal Debit Credit Record entry Clear entry View general journal Required 1 Required 2 >

Answer 1

Gift cards are subject to sales tax upon redemption. On the event of redemption of gift cards, they shall be recognized as sales revenue. Before the redemption, they shall be classified as a liability. Gift cards are redeemed against the sales value. When the sales revenue is recognized, receipt in cash is computed by deducting gift certificate against sales revenue including sales tax if any.

Part 1

Event	Particulars	Debit ($)	Credit ($)
1	Cash	8,000
	Gift Certificate Liability		8,000
	(To record gift cards and meals sold)
2	Cash [3100+(4% X 3100)-2700]	524
	Gift Certificate Liability	2,700
	Sales revenue		3,100
	Sales tax payable (4% X 3100)		124
	(To record redemption of gift cards and meals sold in 2021 and redeemed in 2021)

Part 2

Particulars	Amount ($)
Gift Certificates Sold	8,000
Less: Gift certificates redeemed	2,700
Gift certificate liability	5,300

Part 3

Current liability is for gift cards payable within one year and the balance gift card shall be recognized as noncurrent liability.

Particulars	Amount ($)
Current Liabilities
Sales tax payable	124
Gift certificates sold	8000
Estimated % redeemed within 1 year	80%
Estimated current liability before redemption (8000 * 80%)	6,400
Gift certificates redeemed in 2021	2,700
Remaining gift certificates classified as current liability	3,700
Noncurrent liabilities
Gift certificates classified as noncurrent liability
Unredeemed gift certificates	5,300
Current portion of unredeemed certificates	(3,700)
Noncurrent liability	1,600

Required at glance

Sales Tax liability- current	124
Sales tax liability- noncurrent	NIL
Liability gift cards and meals- current	3,700
Liability gift cards and meals- noncurrent	1,600

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