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I couldn’t understand the part of calculation for breakage in the Answer provided by ACCA. why is it Kiki should recognised $1.43 ($1×100/70) for every $1 of gift voucher is redeemed, why revenue is recognised $0.43 more than the selling price? Is this calculation related to expected value calculation?
Could you please help me on my query?
I wasn’t aware that there was another specimen exam that had been provided. I’ll download it and have a look at it and get back to you with an answer.
Hi Opentuition Tutor,
Below is the link,
When we receive the cash we will DR Bank CR Deferred income (contract liability).
Now we know based upon past experience that the full amount of the deferred income will not be used as we only 70% is redeemed. Therefore if only the 70% is redeemed then for every 70 cents that is recognised then 30 cents would be left as deferred income, but this cannot just stay there indefinitely so we need to release it too as the vouchers are redeemed. As the gross amount to be recognised is 100 cents and we receive only 70 cents then we need to gross it up by 100/70 in order to clear out the deferred income in full.
Effectively we have been CR Revenue 70 DR Deferred income 100 (which obviously doesn’t balance!), but to ensure that the full revenue is recognised we need to take 100/70 to recognise the full amount of revenue.
Hope that helps.