Neepawa Sports Inc. (Neepawa) operates sporting goods stores in several medium-sized cities in western Canada. For several years Neepawa has offered gift cards for sale as a convenient gift option for customers.

The cards can be exchanged for any merchandise in Neepawa’s stores but can’t be redeemed for cash. At the beginning of 2014, Neepawa had $215,000 in its unredeemed gift card liability account. During 2014, gift cards worth $542,000 were sold and $389,000 were redeemed to purchase merchandise costing $178,000. Neepawa estimates that about 5 percent of outstanding gift cards outstanding at the end of the year won't be redeemed.

Required

a. For the year ended December 31, 2014, prepare all journal entries (transactional and adjusting) Neepawa must make.

b. How would the unused gift cards be reported in Neepawa’s financial statements?

c. What effect does the sale of gift cards have on Neepawa’s current ratio? What impact does using a gift card have on the current ratio?