Multiple Choice
How should a transaction price for multiple performance obligations in a contract be allocated according to the revenue recognition principle?
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
Multiple Choice
Revenue for gift card breakage should be recognized:
A
When it becomes remote that the gift card will be redeemed
B
At the time the gift card is sold to the customer
C
When the customer uses the gift card to purchase goods or services
D
Only when the gift card expires
Verified step by step guidance1
Understand the concept of gift card breakage: Gift card breakage refers to the revenue recognized from unused gift card balances when it becomes unlikely that the card will be redeemed.
Review the accounting principle for revenue recognition: Revenue should be recognized when it is earned and realizable. For gift card breakage, this occurs when the likelihood of redemption becomes remote.
Analyze the options provided: Evaluate each option to determine which aligns with the principle of recognizing revenue when it is earned and realizable.
Eliminate incorrect options: For example, revenue is not recognized at the time of sale because the obligation to provide goods or services still exists. Similarly, revenue is not recognized only when the card expires, as expiration is not always necessary for breakage recognition.
Select the correct option: The correct answer is 'When it becomes remote that the gift card will be redeemed,' as this is the point at which the company can reasonably recognize the breakage revenue.
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