The Show Time movie theatre sells thousands of gift certificates every year. The certificates can be redeemed at any time since they have no expiry date. Some of them may never be redeemed (because they are lost or forgotten, for example). The owner of the theatre has raised some questions about the accounting for these gift certificates.
Instructions
Write an e-mail to answer the following questions from the owner:
(a) Why is a liability recorded when these certificates are sold? After all, they bring customers into the theatre, where they spend money on snacks and drinks. Why should something that helps generate additional revenue be treated as a liability?
(b) How should the gift certificates that are never redeemed be treated? At some point in the future, can the liability related to them be eliminated? If so, what type of journal entry would be made?