Journal entries for scratch cards
Global Children is a charitable organisation, which raises funds for the care of children around the world. A South African branch of the organisation, GC (SA), opened recently. Subsequent to extensive market research, the organisation plans to raise funds by launching its own scratch card competition, starting in December X0. It plans to apply the following conditions to the sale of scratch cards and payments of prizes:
- Scratch cards will be sold for N$2 (cash) each.
- The design, printing and distribution costs of the scratch card are estimated to be 50 cents per card.
- The organisation has decided that for every 50 000 scratch cards, prize money of N$ 60 000 will be rewarded (on average, every scratch card will pay a prize of N$1.20).
- Individual scratch cards will either reflect no prize, or prizes ranging from N$2 to N$10 000.
- Each prize under N$100 is paid out immediately in cash, whereas prizes exceeding N$100 need to be claimed by post from the organisation’s head office in Cape Town.
The manager of GC (SA) has asked you for advice regarding the correct accounting treatment of the scratch cards to be reflected in the financial statements for the year ended 31 December X0. The manager has asked two questions:
(a) If N$50 000 expenditure is incurred for the design, printing and distribution of 100 000 scratch cards, but none are sold by 31 December X0, should this expenditure be treated as an asset?
(b) If 40 000 of the scratch cards purchased in (a) above are sold during December X0 and prizes totalling N$38 000 have been paid by 31 December X0, should these transactions be reflected in the financial statements?
You are required to:
- Advise the manager, with specific reference to the IAS Framework (‘’Framework for the Preparation of Financial Statements’’), whether the expenditure of N$50 000 should be treated as an asset in the financial statements. (9 marks)
