Question
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.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IFRS 15 — Revenue from Contracts with Customers
Apply the five steps in order: identify the contract, identify the performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue as each is satisfied. Most errors come from skipping straight to the amount without first separating the obligations.
Common mistakes
- Recognising the full contract price on delivery when a distinct service obligation is still outstanding.
- Allocating the transaction price other than on relative stand-alone selling prices.
- Recognising revenue when cash is received rather than when control transfers.
Further readingIFRS 15: the five-step model