Deferred Revenue

Question 1

How should a security deposit be classified?

Answer 1

As a liability.

Question 2

A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?

1) Redemption of gift certificate
2) Lapse of gift certificate

Answer 2

The redemption of the certificates would decrease deferred revenue and increase revenue because the earnings process is completed once the store delivers the merchandise. If the gift certificates lapse, this will also decrease unearned revenue and recognize other income or a payable if the governing authorizes require these amounts to be remitted as unclaimed property.