Cayley Gifts Limited is a chain of gift stores. Cayley sells gift cards that can be redeemed at any of its stores. You are provided with the following information about Cayley's gift cards for the year ended January 31, 2017:
Unredeemed amount on February 1, 2016 ......... $110,000
Gift card purchases during fiscal 2017 ............ 370,000
Gift card redemptions during fiscal 2017.......... 325,000
a. What amount should Cayley report for unredeemed gift cards on January 31, 2017?
b. How should this amount be reported in the financial statements (which statement)? Explain why it should be reported this way.
c. Suppose that in the past, 5 percent of Cayley's gift cards were never redeemed. How would that affect the amount you report for unredeemed gift cards? What happens to the money customers pay for unredeemed gift cards? Are unredeemed gift cards good or bad for Cayley?