Final answer:
The company needs to record $400 as revenue on December 31, 2016, by debiting the unearned revenue liability and crediting the revenue account, reflecting services rendered for the redeemed gift certificates.
Step-by-step explanation:
When analyzing the scenario provided, we should consider accounting principles. On December 1, 2016, the company sold $500 in gift certificates for decorating services to a customer. According to accrual accounting, this amount will be recorded as unearned revenue, a liability on the balance sheet since the services have not yet been provided.
On December 31, 2016, the company received $400 worth of redeemed gift certificates. This indicates that services have been provided to the customers who used these gift certificates. The accountant must now recognize this amount as revenue and reduce the liability appropriately. The journal entry would involve debiting the unearned revenue account and crediting the revenue account to reflect the earned portion of the gift certificates.
To summarize, $500 was initially recorded as a liability, and upon redemption of $400 worth of certificates, this amount is recognized as revenue, thereby reducing the liability account by the same amount.