Intermediate Accounting II Chapter 13

gift card

a (liability) certificate allowing the holder to receive goods or services of a specified value from the issuer.

breakage

when a percentage of the company’s total gift card sales is never redeemed

How do we account for gift cards?

Records the transaction as unearned (gift card) revenue when issuing the gift card by debiting cash and crediting a liability for the unearned gift card revenue on the date it sells the cards.

Remote Method to deal with gift cards

company/seller recognizes revenue from gift card breakage and removes the liability for the advance collection only when the probability of redemption becomes remote. (i.e., Debit the unearned revenue liability and Credit revenue)

Proportional Method to deal w/gift cards

deposit

an amount a buyer remits to a seller that will be returned to the buyer at some point in time when a specific event occurs.

Compensated absences (PTO)

employer-paid time off for vacation, illness, holidays, military service, jury duty, and maternity leave

An employer must meet ALL four criteria to report an expense and accrue a liability for future paid absences

1. The obligation for future payment is a result of services already performed by the employee.

2. The benefits to be paid either vest or accumulate.

3. The future payment must be probable.

4. The future payment must be reasonably estimable.

Vested rights

exist when an employer has the obligation to make compensation payments if it (or the individual) terminates employment. The rights to the benefits are not dependent on future employment.

Accumulated rights

permit an employee to carry forward unused benefits to future periods (EX: PTO)

Asset retirement obligations (AROs)

long-term legal obligations to dismantle and scrap assets or to restore property used for business purposes (usually after a company closes down a certain building of business practices)

Accounting for an ARO requires

estimating the fair value that the company would have to pay to retire the asset in today’s market. (may involve a substantial amount of judgment)

account for asset retirement obligations

recognizes the amount of the ARO as a liability and records accretion expense over the life of the obligation using the effective interest rate method of amortization

Accretion expense

the expense, reported in operating income, resulting from the increase in the carrying amount of the liability