While preparing for an upcoming exam, you are studying with some classmates when one of them asks the following:
“Am I correct that breakage represents the value of the gift cards that we don’t expect that customers will ever redeem? My understanding is that since we don’t expect to have to honour the cards, they represent revenue that can be recognized in the period in which the gift cards are sold.”

Required

Evaluate your classmate’s response. Identify the elements that are correct and incorrect.