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Orange sells gift cards in $15, $25, and $50 increments. Assume Orange sells $19.6 million in iTunes gift cards in November, and customers redeem $12.6 million of the gift cards in December.Required:1. & 2. Record the necessary entries in the Journal Entry Worksheet below.3. What is the ending balance in the Deferred Revenue account?

Question

Orange sells gift cards in 15,15, 25, and 50increments.AssumeOrangesells50 increments. Assume Orange sells 19.6 million in iTunes gift cards in November, and customers redeem $12.6 million of the gift cards in December.Required:1. & 2. Record the necessary entries in the Journal Entry Worksheet below.3. What is the ending balance in the Deferred Revenue account?

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Solution

  1. & 2. Here are the necessary journal entries:

    • In November, when the gift cards are sold: Debit: Cash 19.6millionCredit:DeferredRevenue19.6 million Credit: Deferred Revenue 19.6 million

    This entry records the cash received from selling the gift cards. The credit to Deferred Revenue represents a liability, as Orange owes these customers the goods or services purchased with the gift cards.

    • In December, when the gift cards are redeemed: Debit: Deferred Revenue 12.6millionCredit:SalesRevenue12.6 million Credit: Sales Revenue 12.6 million

    This entry removes the liability for the redeemed gift cards and records the revenue earned from the goods or services provided.

  2. The ending balance in the Deferred Revenue account would be the beginning balance plus any new deferred revenue (gift cards sold), minus any deferred revenue that has been recognized (gift cards redeemed).

    So, if we start with a beginning balance of 0(forsimplicity),addthe0 (for simplicity), add the 19.6 million from November, and subtract the $12.6 million redeemed in December, we get:

    0+0 + 19.6 million - 12.6million=12.6 million = 7 million

    Therefore, the ending balance in the Deferred Revenue account is $7 million.

This problem has been solved

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