Bavarian Bar and Grill opened for business in November 2013. During its first two months of operation, the restaurant sold gift certificates in various amounts totaling $5,200, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 80% of gift certificates are redeemed within one year. Certificates totaling $1,300 were presented for redemption during 2013 for meals having a total price of $2,100. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift certificates) are purchased. Sales taxes will be remitted in January.
1. Prepare the appropriate journal entries (in summary form) for the gift certificates sold during 2013 (keeping in mind that, in actuality, each sale of a gift certificate or a meal would be recorded individually.)
2. Determine the liability for gift certificates to be reported on the December 31, 2013, balance sheet.
3. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2013? Why?