Citrine Coffee Co. sells gift cards that never expire. Based on extensive history, the company expects 5% of gift card balances will never be redeemed (breakage), and it recognizes breakage revenue in proportion to the pattern of actual redemptions (IFRS 15).
| Date | Event |
|---|
| November 15 | Sold gift cards totalling $12,000 for cash. |
| November 16 – December 31 | Customers redeemed $5,700 of the gift cards for coffee and merchandise. |
| December 31 | Year-end adjustment: recognize breakage revenue in proportion to redemptions to date. |
Required: Prepare the entry for the gift card sale (November 15), one summary entry for the redemptions (December 31), and the breakage adjustment (December 31). Use an Unearned Revenue account for the gift card liability and credit Sales Revenue when revenue is recognized. Hint: expected redemptions are $12,000 × 95% = $11,400, and $5,700 is exactly half of that.