Chapter 17, Problem 9P

1.

To determine

Journalize entries for January through March.

Explanation of Solution

Contract: Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
January,2017	Cash (1)	150,000
	unearned revenue		150,000
	( To record the sale of gift cards)
Febraury,2017	Unearned revenue	45,000
	Sales revenue		45,000
	(To record the amount of unearned revenue)
	Unearned revenue (2)	5,400
	Sales revenue		5,400
	(To record the amount of unearned revenue)
March,2017	Unearned revenue	80,000
	Sales revenue		80,000
	(To record the amount of unearned revenue)
	Unearned revenue (3)	9,600
	Sales revenue		9,600
	(To record the amount of unearned revenue)
	Sales revenue (4)	5,000
	Unearned revenue		5,000
	(To record the amount of sales revenue)

Table (1)

Working notes:

(1)Calculate the amount of cash:

$\begin{array}{c}\text{Cash}\text{=}\left(\begin{array}{l}\text{Number}\text{of}\text{gift}\text{cards}\text{×}\\ \text{Face}\text{value}\text{per}\text{gift}\text{card}\end{array}\right)\\ \text{=}\text{500}\text{cards}\text{×}\text{\$300}\\ \text{=\$150,000}\end{array}$

(2)Calculate the amount of unearned revenue (breakage revenue) during February, 2017:

$\begin{array}{c}\text{Unearned}\text{breakage}\text{revenue}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{gift}\text{cards}\text{redeemed}\text{×}\\ \text{Percentage}\text{of}\text{gift}\text{cards}\text{not}\text{redeemed}\end{array}\right)\\ \text{=\$45,000}\text{×}\text{12\%}\\ \text{=}\text{\$5,400}\end{array}$

(3)Calculate the amount of unearned revenue (breakage revenue) during March, 2017:

$\begin{array}{c}\text{Unearned}\text{breakage}\text{revenue}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{gift}\text{cards}\text{redeemed}\text{×}\\ \text{Percentage}\text{of}\text{gift}\text{cards}\text{not}\text{redeemed}\end{array}\right)\\ \text{=\$80,000}\text{×}\text{12\%}\\ \text{=}\text{\$9,600}\end{array}$

(4)Calculate the amount of sales revenue (breakage revenue adjustment) during March, 2017:

    $\begin{array}{c}\begin{array}{l}\text{Sales}\text{revenue}\text{(}\text{breakage}\\ \text{revenue}\text{adjustment)}\end{array}\}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Amount}\text{of}\text{gift}\text{card}\text{redeemed}\text{during}\text{February,2019+}\\ \text{Amount}\text{of}\text{gift}\text{card}\text{redeemed}\text{during}\text{March,2019}\end{array}\right)\text{×}\\ \left(\begin{array}{l}\text{Percentage}\text{of}\text{gift}\text{cards}\text{not}\text{redeemed}-\\ \text{Percentage}\text{of}\text{gift}\text{cards}\text{unused}\end{array}\right)\end{array}\right]\\ \text{=}\left[\left(\text{\$80,000+\$45,000}\right)\text{×}\left(\text{12\%}-\text{8\%}\right)\right]\\ \text{=}\text{\$125,000×}\text{4\%}\\ \text{=\$5,000}\end{array}$

2.

To determine

Prepare journal entries, assuming that the Incorporation E reduces its estimate amount of gift cards.

Explanation of Solution

Prepare journal entries:

Date	Account titles and explanation	Debit ($)	Credit ($)
April,2017	Unearned revenue	10,000
	Sales revenue		10,000
	(To record the amount of unearned revenue)

Table (2)

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by$10,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $10,000.

Date	Account titles and explanation	Debit ($)	Credit ($)
April,2017	Unearned revenue (5)	800
	Sales revenue		800
	(To record the amount of unearned revenue)

Table (3)

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by$800.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $800.

Working note:

(5)Calculate the amount of unearned revenue (breakage revenue) during April, 2017:

$\begin{array}{c}\text{Unearned}\text{breakage}\text{revenue}\text{=}\left(\begin{array}{l}\text{Amount}\text{of}\text{gift}\text{cards}\text{used}\text{×}\\ \text{Percentage}\text{of}\text{gift}\text{cards}\text{used}\end{array}\right)\\ \text{=\$10,000}\text{×}\text{8\%}\\ \text{=}\text{\$800}\end{array}$