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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Escargot Inc. is a 5-star restaurant in Cincinnati. The restaurant sells 500 gift cards during January 2019. Each gift card has a face value of $300. The gift cards never expire, although based on industry experience, Escargot expects that 12% of the balances will never be redeemed. During February 2019, $45,000 of gift cards are redeemed, and in March 2019 another $80,000 is redeemed.

Required:

  1. 1. Prepare journal entries for Escargot’s gift card transactions for January through March.
  2. 2. Assume that in April, due to the popularity of the restaurant, Escargot reduces its estimate of the amount of gift cards that will go unused to 8%. During April, gift cards worth $10,000 are used. Prepare any necessary journal entries.

1.

To determine

Journalize entries for January through March.

Explanation

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:

DateAccount titles and explanationDebit ($)Credit ($)
January,2019Cash (1) 150,000 
      unearned revenue  150,000
  ( To record the sale of gift cards)  
Febraury,2019Unearned 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,2019Unearned 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:

Cash=(Numberofgiftcards×Facevaluepergiftcard)=500cards×$300=$150,000

(2)Calculate the amount of unearned revenue (breakage revenue) during February, 2019:

Unearnedbreakagerevenue=(Amountofgiftcards

2.

To determine

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

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