Starbucks began operations in December of 2016. The company sold gift certificat

Question

Starbucks began operations in December of 2016. The company sold gift certificates during December in various amounts totaling $1,600.
The gift certificates are redeemable for merchandise within three years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2016 as part of merchandise purchases having a total retail price of $750.
1. Determine the liability for gift certificates to be reported in the December 31, 2016, balance sheet.
2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2016? Show calculations.

Explanation / Answer

1. Liability for gift certificates on December 31, 2016, Balance Sheet: $1100

Gift certificates liability = Gift certificates sold - Redeemed in 2016 = $1600 - $500 = $1100.

2. Classification of gift certificates liability at December 31, 2016:

Current liability: $940

Non-current liability: $160

Since 90% of gift certificates are predicted to be redeemed within one year, the balance 10% will be a non-current liability. Hence non-current liability = 10% x $1600 = $160

Current portion = $1100 - $160 = $940.

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