Exercise 13-6

Bavarian Bar and Grill opened for business in November 2018.

During its first two months of operation, the restaurant sold gift
certificates in various amounts totaling $5,200, mostly as
Christmas presents. They are redeemable for meals within two
years of the purchase date, although experience within the
industry indicates that 80% of gift certificates are redeemed within
one year. Certificates totaling $1,300 were presented for
redemption during 2018 for meals having a total price of $2,100.
The sales tax on restaurant sales is 4%, assessed at the time
meals (not gift certificates) are purchased. Sales taxes will be
remitted in January.

© Dr. Chula King

All Rights Reserved

Exercise 13-6 (continued)

Part 1: Prepare the appropriate journal entries (in summary form)
for the gift certificates sold during 2018 (keeping in mind that, in
actuality, each sale of a gift certificate or a meal would be reported
individually).
Cash 5,200
Gift Certificate Liability 5,200
Cash [2,100+(4%x2,100) – 1,300] 884
Gift Certificate Liability 1,300
Sales revenue 2,100
Sales tax payable (4%x2,100) 84
Part 2: Determine the liability for gift certificates to be reported on
the December 31, 2018 balance sheet.
Gift certificates sold $5,200
Less: Gift certificates redeemed (1,300)
Gift Certificate Liability $3,900
© Dr. Chula King
All Rights Reserved

Exercise 13-6 (continued)

Part 3: What is the appropriate classification (current or noncurrent)
of the liabilities at December 31, 2018? Why?
Current Liabilities
Sales tax payable $ 84
Gift certificates sold $5,200
Estimated % redeemed within 1 year x 80%
Estimated current liability before redemption $4,160
Gift certificates redeemed in 2018 (1,300)
Remaining gift certificates classified as current liability $2,860
Noncurrent Liabilities
Gift certificates classified as noncurrent liability
Unredeemed gift certificates $3,900
Current portion of unredeemed certificates (2,860)
Noncurrent liability $1,040
© Dr. Chula King
All Rights Reserved