WOMEN’S UNIVERSITY IN ARICA

Addressing gender disparity and fostering equity in University Education

FACULTY OF MANAGEMENT AND ENTREPRENEURIAL

DEVELOPMENT STUDIES
BSc HONOURS DEGREE IN ACCOUNTING SCIENCE
EVENING CLASS INTAKE 11
Full Name of Student: Kudzai Murairwa

Student ID: W191279

Course Code: BAS121

Course Name: Intermediate Accounting

Lecturer: Dr M Chikerema

Date: 16 April 2020

SCENARIO: Discuss how the sale off gift vouchers of NM Ltd should be measured
and recognised in terms of IFRS for the year ended 29 February 2019.

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Liability Recognition. The initial sale of gift vouchers triggers the recognition
of a liability, not a sale. This is a debit to cash and a credit to the gift vouchers
outstanding.
IFRS15 specifies in it that gift vouchers are in other words customer’s
unexercised rights that will be exercised in some future point. NM Ltd have to
recognise the amount attributable to that unexercised right worth of $25600.00
as a contract liability.
Journal entries at the moment of sale and giving out vouchers is:
 DR cash received: $25 600.00
 CR contract liability $25 600.00
Not forgetting to book the cost of sales related to the delivered merchandise.
Sale Recognition. When the voucher is redeemed or used the initial liability is
shifted into a sale transaction. Of the $15400 worth vouchers (ordinary with
12 months expiry date), $12960 where redeemed by the end of February 2019.
Of the $10200 worth of promotional vouchers, $7440.00 worth were redeemed
by the of the financial year ended 29 February 2019. Therefore the total of
$20400 to be recognise as revenue. This amount has to be shifted into a sale
transaction by debiting the gift vouchers outstanding and credit the revenue
account.
Journal entries for the redeemed vouchers will be as follows:
 DR contract liability: $20 400.00
 CR Revenue from sale of goods:$20400.00
Contract Liability figure will be posted to the statement of financial position
and revenue from sale of goods will be posted to the income statement.
Not forgetting to book the cost of sales related to the delivered merchandise.
NM Ltd sold some of the vouchers on promotion where a customer
purchasesa$120 gift voucher for $100, essentially providing an incentive or
discount of $20. NM Ltd must ensure these vouchers are tracked separately
from other normal or ordinary vouchers sales through a separate sequence of
vouchers Promotional vouchers revenue should be recognised on their
discounted figures not on face value so that the company will not over state its
profits. Sale discounts are expenses to the company and to be posted to the
income statement.
Breakage. If there is a reasonable expectation that a certain proportion of gift
cards will not be used, this amount can be recognised as revenue. IFRS 15
states that if the vouchers have some validity period, then the unused service
after the period lapses to be recognised as revenue. From the scenario of the
$5200 worth of vouchers $2760.00 worth of promotional vouchers included in
the unredeemed vouchers by 29 February 2019 had already expired on the 31
January 2019, these should be recognised as revenue. The remainder of
$2440.00 worth of vouchers will still be contract liability by end of February
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2019 since they are yet to expire. If the customer does not redeem the gift
voucher and the validity period lapses, then the journal entry is the same as on
sale recognition, just the revenue would be titled something like ‘revenue from
breakage’ or so.
Escheatment. Each country and territory have different unclaimed property
laws regarding to gift cards or vouchers and the time before escheatment.
These differences in state laws impact gift cards breakage, the revenue
companies gain through unredeemed gift cards. Where the escheatment laws
apply, when a gift card is not used, the funds must be remitted to the
applicable state government; the company cannot retain the cash. This
requirement is stated under the local escheatment laws that cover unclaimed
property. This means the unexercised right will continue to carry a liability
name as from sale of the card until the escheatment. Consequently, there must
be a system for tracking unused gift cards, which trigger a remittance once the
statutory dormancy period has been exceeded.
Journal Entries for NM LTD
DATE DETAILS DR CR
2018 Cash- 25600
Dec Gift voucher liability 25600

Being the sale of gift vouchers in Dec 2018

Dec Cash 12240

Promotional vouchers 10200
Gift voucher liability discount 2040

Being the sale of promotional vouchers on

a discount

Gift voucher liability 20400

Gift voucher revenue 20400

Being the redemption of the gift vouchers

2019 Gift voucher liability 2760

Feb 29 Breakage revenue 2760

Being the proportionate recognition of

breakage income of promotional vouchers

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