Question

Spa Inc. gathered the following information related to its gift card sales for 2020, its first year of selling gift cards: Sales of nonrefundable gift cards, 2020$25,500 Gift card redemptions, 2020$18,360 Spa Inc. estimates that 95% of the value of gift cards sold in 2020 will be redeemed while 5% will remain unclaimed. Under the proportional method, what would Spa Inc. recognize for gift card breakage revenue in 2020

Answer 1

Answer: $969

Step-by-step explanation:

Since 5% of the value of the gift card sold will be unclaimed, the amount claimed will be:

= $25500 - (5% × $25500)

= $25500 -(0.05 × $25500)

= $25500 - $1275

= $24225

We then find the percentage of the cards that have been redeemed already and this will be:

= $18360 / $24225

= 0.7579

= 76%

Therefore, breakage in revenue to be recognized will be:

= ($25500 × 5%) × 76%

= $1275 × 76%

= $1275 × 0.76

= $969