Question

Regal Department Store sells gift certificates, redeemable for merchandise, that expire 1 year after their issuance. Regal has the following information pertaining to its gift certificates sales and redemptions:

Unredeemed at 12/31/Year 1
$ 75,000
Year 2 sales
250,000
Year 2 redemptions of prior-year sales
25,000
Year 2 redemptions of current-year sales
175,000
Regal's experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, Year 2, balance sheet, what amount should Regal report as unearned revenue?

Answer 1

$50,000

Step-by-step explanation:

Since the gift certificates being sold expire 1 year after their issuance, this implies that all revenues in Year 1 will be recognized as already earned. Therefore, the calculation of the unearned revenue will based on Year 2 sales only since their certificates have not expired.

Since,

Amount of gift certificates sold in Year 2 that will not be redeemed = Year 2 sales * 10% = $250,000 * 10% = $25,000

Therefore, we have:

Unearned revenue in Year 2 = Year 2 sales - Year 2 redemptions of current-year sales - Amount of gift certificates sold in Year that will not be redeemed = $250,000 - $175,000 - $25,000 = $50,000

Therefore, Regal should report $50,000 as unearned revenue in its December 31, Year 2, balance sheet.