Question

Maffett Ticket Brokers is a reseller of tickets to sporting events and concerts. During 2019, Maffett sold gift cards totaling $250,000 Based on past experience, Maffett expects that 1% of the gift card purchases will not be redeemed by the time they expire, five years after Issuance. During 2019, $150,000 of the gift card purchases from 2019 were used to purchase tickets that had cost Maffett $90,000. Required: 1. Prepare the journal entry Maffett uses to record its activity related to the above transactions In 2019, assuming state law does not require Maffett to remit the breakage to the state. 2 Prepare the journal entry Maffett uses to record its activity related to the above transactions in 2019, assuming state law requires Maffett to remit the breakage to the state upon explration of a gift card.

Answer 1

Journal entry to record gift card transaction by maffett assuming law does not require maffett to remit breakage to the state :-

General journal	debit	credit
Gift card liability Sales revenue Breakage revenue (To sales through gift card recorded )	151515	150000 1515
Cost of goods sold Inventory (To cost of goods sold recorded )	90000	90000

Working note

Total value of gift cards expected to be used for purchasing = $250000x99% = $247500. However in 2019 gift cards used to make purchase = $150000 which means 150000/247500 = 60.61%. of total.

Please note that since we are not required to remit breakage to state thus revenue from it can also be recognized which will be $2500x60.61% = $1515.

Requirement 2 . Journal entry if state law requires Maffett to remit the breakage to the state upon expiration

Particulars	debit	credit
Gift card liability Sales revenue (To sales through gift card )	150000	150000
Cost of goods sold Inventory (To cost of goods sold recorded)	90000	90000

Note :- since remittance is required at the end of breakage thus no use of recognizing it as revenue.