Question

a retailer sells prepaid gift cards under its own brand to customers, which are popular during the holidays. if a company sells $200 worth of gift cards to a customer before xmas but the same are not used to purchased goods until after the new year's, how the retailer record this transaction?

Answer 1

Solution :

Generally Gift Cards sold creates a obligation to a company to provide good and services at a discounted price or other similar offer therefore it is treated as a liability and when gift card are redeemed, service revenue is recognised. In this case, retailer has sold gift card worth $ 200 for a future obligation which has not been utilised till new year. It will be treated as an obligation. Following Entry will be recorded :

Cash	$ 200
Unearned Service Revenue/ Gift Card Liability		$ 200

and When it will be redeemed, following entry will be passed :

Unearned Service Revenue/ Gift Card Liability	$ 200
Service Revenue		$ 200

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