© 2015 Cengage Learning. All Rights Reserved. LESSON 9-2 Accounting for Gift Cards Learning Objectives LO3 Journalize transactions for gift cards. LO4 Record an adjusting entry for gift card breakage. LO5 Describe how gift card breakage is reported in the financial statements. © 2015 Cengage Learning. All Rights Reserved.

Recording the Sale of a Gift Card Lesson 9-2 Recording the Sale of a Gift Card LO3 The use of gift cards has increased dramatically in recent years. The sale of a gift card does not result in revenue. Until the card is redeemed, the outstanding balance of the card is unearned revenue. Websites and smartphones enable virtual gift cards to be purchased, redeemed, and tracked electronically. © 2015 Cengage Learning. All Rights Reserved.

© 2015 Cengage Learning. All Rights Reserved. Lesson 9-2 The Credit Card Accountability Responsibility and Disclosure Act of 2009 LO3 The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) includes provisions designed to protect the value of gift cards. Retailers are not allowed to charge fees on unredeemed cards for 12 months. Unredeemed cards cannot be canceled until five years after the date of issuance. © 2015 Cengage Learning. All Rights Reserved.

Recording the Sale of a Gift Card Lesson 9-2 Recording the Sale of a Gift Card LO3 Gift Cards Outstanding 625.00 April 1. Received cash for the sale of gift cards, $625.00. Receipt No. 522. Cash 625.00 A Current Liability Account © 2015 Cengage Learning. All Rights Reserved.

Recording a Sale with a Gift Card Lesson 9-2 Recording a Sale with a Gift Card LO3 August 2. Customers redeemed gift cards for the sale of merchandise, $320.00, plus sales tax, $19.20. Memorandum No. 325. 1 Debit Gift Cards Outstanding Credit Sales Tax Payable 3 2 Credit Sales © 2015 Cengage Learning. All Rights Reserved.

Accounting for Unredeemed Gift Cards Lesson 9-2 Accounting for Unredeemed Gift Cards LO4 Some gift cards are never redeemed or only partially redeemed before discarded or lost. The value of unredeemed gift cards is called breakage. © 2015 Cengage Learning. All Rights Reserved.

Reporting of Gift Card Breakage Lesson 9-2 Reporting of Gift Card Breakage LO5 Breakage revenue is a normal part of business operations. Most businesses elect to include breakage revenue with other sales accounts instead of including the amount as other revenue. Breakage Revenue is listed separately on the income statement to allow users to compare the amount of revenue from sales with the related cost of merchandise sold. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9-2 Audit Your Understanding 1. How do plastic and virtual gift cards differ in the information they provide to the retailer? ANSWER Virtual gift cards, unlike plastic gift cards, enable the retailer to collect the name and contact information of the cardholder and track the unused card balance. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9-2 Audit Your Understanding 2. How does the Credit Card Accountability Responsibility and Disclosure Act of 2009 protect gift cardholders? ANSWER The Credit CARD Act does not allow the retailer to charge fees on unredeemed cards for 12 months. Unredeemed cards cannot be canceled until five years after the date of issuance. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9-2 Audit Your Understanding 3. When is a sale recorded from the issuance of a gift card? ANSWER A sale is recorded when a customer pays for merchandise using a gift card. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9-2 Audit Your Understanding 4. In what section of the income statement is the account Breakage Revenue reported? ANSWER Other Revenue. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9-2 Audit Your Understanding 5. Identify information related to gift cards that is disclosed in the notes to the financial statements. ANSWER The notes to the financial statements include the policies for how and when breakage revenue is recognized, the amount of unredeemed cards, and how gift-card-related accounts are presented on the financial statements. © 2015 Cengage Learning. All Rights Reserved.