Question

a. Fuhgettaboudit Ltd. operates an Italian restaurant and sells gift cards. At October 31, 2020, Fuhgettaboudit had outstanding gift cards totalling $20,000, of which it expects $2,000 will never be redeemed. What should Fuhgettaboudit report on its statement of financial position at October 31, 2020, in relation to the gift cards?

Answer 1

Solution:

Total outstanding gift cards = $20,000.

Amount of gift cards that are expected never to be redeemed = $2,000

When gift cards are expected never to be redeemed then that amount can be recognized as a breakage. So, this amount is released to the income statement as a breakage revenue.

The bookkeeping journal to reflect this breakage transaction for gift cards amount that is never expected to be reedemed is as follows:

Accounting for gift card transactions – breakage

Account	Debit	Credit
Gift card liability	$2000
Revenue		$2000
Total	$2000	$2000

So, $2,000 needs to be recorded as a breakage revenue in income statement.

Statement of financial position at October 31, 2020, should report following in relation to the gift cards:

Gift card liability (deferred revenue) = $20,000 - $2,000 = $18,000.