Which of the statements below describes how TIF accounts for sales of gift cards

Question

Which of the statements below describes how TIF accounts for sales of gift cards on its balance sheet and income statement? You may select more than one.

Select one or more:

a. Revenue is recognized when the gift card is sold

b. Revenue is recognized when merchandise is purchased using the gift card and delivered to the customer

c. The gift card liability is relieved when merchandise is purchased using the gift card and delivered to the customer

d. A gift card liability is established when the gift card is sold

e. All of these answers

f. Gift card liabilities are included in the line item “Merchandise credits and deferred revenue” on the balance sheet

Explanation / Answer

Whenever a gift card is sold, the following entry is recorded -

Cash A/C dr.

To Gift Cards Outstanding A/C

( Revenue is recorded only when the merchandise is purchased by the customer using the gift card. )

When gift card is used for purchasing merchandise, then the following entry is recorded -

Gift Cards Outstanding A/C Dr.

To Sales Revenue A/C

(a) Revenue is recognised when the gift card is sold.

INCORRECT

Reason - because liability for Gift Cards Outstanding is generated when gift card is sold and no revenue is recognised.

(b) Revenue is recognised when merchandise is purchased using the gift card and delivered to the customer.

CORRECT

Reason - because the revenue can be recognised only when the gift card is used by the customer.

(c) the gift card liability is relieved when merchandise is purchased using the gift card and delivered to the customer.

CORRECT

Reason - because the liability Account is debited when merchandise is purchased using gift card.

(d) a gift card liability is established when the gift card is sold.

CORRECT

Reason- because a liability account is credited when the gift card is sold.

(f) Gift card liabilities are included in the line item "Merchandise credits and deferred revenue" on the balance sheet.

CORRECT

Reason - because the uncashed gift card liabilities are included in a deferred revenue account in the balance sheet.

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