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? $44,000$40,000$36,000$4,000

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BlackTom AI · Accepted Answer

Re-stating the scenario helps frame the calculation: Bistro Haven Ltd. issued gift cards totaling $40,000, and management expects that $4,000 of these will never be redeemed. The gift card liability on the balance sheet represents the amount the company still owes to customers who can redeem their gift cards.

Option by option analysis:

- Option $44,000: This would imply the liability is greater than the amount issued, which makes little sense because no more liability is created beyond the total value of gift cards issued unless there is additional unrecorded liability. Since the company only issued $40,000 in gift cards, this option is incorrect.

- Option $40,000: This represents the full amount issued with no recognition of breakage. If some portion is expected not to be redeemed, the liability should be reduced to reflect the expectation of non-redemption. Therefore $40,000 overstates the liability and is incorrect.

- Option $36,000: This equals the total gift cards issued minus the portion expected to be unredeemed ($40,000 − $4,000). The gift card liability should reflect only the amount expected to be redeemed and outstanding at the balance sheet date, since the unredeemed portion is recognized as breakage revenue when appropriate. So this value aligns with the intended accounting treatment.

- Option $4,000: This is the amount expected not to be redeemed, i.e., breakage. While this is useful information for recognizing revenue, it is not the liability remaining on the balance sheet, which should reflect the portion that customers can still redeem. Thus this option is incorrect.

In summary, the correct approach is to take the total issued gift card value and subtract the portion expected to be unredeemed, yielding the remaining liability that could be redeemed by customers. This leads to a balance corresponding to $36,000.

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