Question at position 6 Bistro Haven Ltd. operates a French restaurant and sells gift cards. At December 31, 2024, the company issued gift cards totaling $40,000, of which it expects $4,000 will never be redeemed. What is the balance of the gift card liability at December 31, 2024? Bistro Haven Ltd. operates a French restaurant and sells gift cards. At December 31, 2024, the company issued gift cards totaling $40,000, of which it expects $4,000 will never be redeemed. What is the balance of the gift card liability at December 31, 2024? $4,000$44,000$40,000$36,000

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BlackTom AI · Accepted Answer

The problem presents gift cards issued by Bistro Haven Ltd. and asks for the balance of the gift card liability at year-end (Dec 31, 2024).
First, note the key figures: total gift cards issued = 40,000, and the company expects 4,000 of those will never be redeemed (breakage).
Option 1: $4,000. This amount represents the estimated unredeemed or breakage portion, not the liability that remains for redeemable gift cards. The liability should reflect the portion customers can still redeem, so this figure is not correct as the gift card liability balance.
Option 2: $44,000. This would imply adding both the redeemable amount and the unredeemed amount to the liability, effectively double-counting or misclassifying the breakage. In reality, liability should only cover the portion that remains payable upon redemption, not additional sums.
Option 3: $40,000. This corresponds to the total amount of gift cards sold without accounting for breakage. Since some cards are expected not to be redeemed, carrying the full $40,000 overstates the liability.
Option 4: $36,000. This is the redeemable portion of the gift cards: 40,000 minus the expected 4,000 that will not be redeemed. Therefore, the liability at December 31, 2024 should reflect the amount customers can still redeem, which is $36,000.
In summary, the correct reasoning hinges on separating total issued gift cards from the portion expected to be redeemed. The unrecovered or breakage portion ($4,000) reduces the liability; the remaining amount ($36,000) remains as the gift card liability. The other options either misstate the unredeemed amount, double-count, or ignore the reduction for breakage.

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