Bavarian Bar and Grill opened for business in November 2018. During its first tw

Question

Bavarian Bar and Grill opened for business in November 2018. During its first two months of operation, the restaurant sold gift certificates in various amounts totaling $8,600, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 80% of gift certificates are redeemed within one year. Certificates totaling $3,000 were presented for redemption during 2018 for meals having a total price of $3,400. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift certificates) are purchased. Sales taxes will be remitted in January. Required 1. Prepare the appropriate journal entries (in summary form) for the gift certificates sold during 2018 (keeping in mind that, in actuality each sale of a gift certificate or a meal would be recorded individually). 2. Determine the liability for gift certificates to be reported on the December 31, 2018, balance sheet. 3. What is the appropriate amount for each classification (current or noncurrent) of the liabilities at December 31, 2018? Complete this question by entering your answers in the tabs below Required 1Required 2 Required3 What is the appropriate amount for each classification (current or noncurrent) of the liabilities at December 31, 2018? Sales tax liability current Sales tax liability noncurrent Liability gift certificates - current Liability gift certificates - noncurrent K Required 2 Required 3

Explanation / Answer

1: Prepare the appropriate journal entries (in summary form) for the gift certificates sold during 2018 (keeping in mind that, in actuality, each sale of a gift certificate or a meal would be reported individually).

General Journal

Debit

Credit

Cash

8600

Gift Certificate Liability

8600

Cash [3400+(4%x3400) – 3000]

536

Gift Certificate Liability

3000

Sales revenue

3400

Sales tax payable (4%x3400)

136

2: Determine the liability for gift certificates to be reported on the December 31, 2018 balance sheet.

Gift certificates sold

$8600

Less: Gift certificates redeemed

(3000)

Gift Certificate Liability

$5600

3: What is the appropriate amount for each classification (current or noncurrent) of the liabilities at December 31, 2018?

Current Liabilities

Sales tax payable

$136

Gift certificates sold

8600

Estimated % redeemed within 1 year

x 80%

Estimated current liability before redemption

6880

Gift certificates redeemed in 2018

(3000)

Remaining gift certificates classified as current liability

$3880

Noncurrent Liabilities

Gift certificates classified as noncurrent liability

Unredeemed gift certificates

$5600

Current portion of unredeemed certificates

(3880)

Noncurrent liability

$1720

General Journal

Debit

Credit

Cash

8600

Gift Certificate Liability

8600

Cash [3400+(4%x3400) – 3000]

536

Gift Certificate Liability

3000

Sales revenue

3400

Sales tax payable (4%x3400)

136

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