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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 3-74 Revenue Recognition

Melaney Parks purchased HealthPlus Fitness in January 2019. Melaney wanted to increase the size of the business by selling 3-year memberships for $3,000, payable at the beginning of the membership period. The normal yearly membership fee is $1,500. Since few prospective members were expected to want to spend $3,000 at the beginning of the membership period, Melaney arranged for a local bank to provide a installment loan to prospective members. By the end of 2019, 250 customers had purchased the 3-year memberships using the loan provided by the bank.

Melaney prepared her income Statement for 2019 and included $750,000 ($3,000 Ă— 250 members) as revenue because the club had collected the entire amount in cash. Melaney’s accountant objected to the inclusion of the entire $750,000. The accountant argued that the $750,000 should be recognized as revenue as the club provides services for these members during the membership period. Melaney countered that memberships have been sold and the collection of the selling price has occurred. Therefore, she argues that all $750,000 is revenue in 2019.

Required:

Would your answer change if the $3,000 fee were nonrefundable? Why or why not?

To determine

Concept Introduction:

Revenue Recognition Principle:

Revenue Recognition Principle states that the revenue should be recorded only when the goods or services are sold and delivered to the customer and the value of goods or service is determinable and collection of the money is not doubtful.

To Indicate:

If the revenue recognition would be different if the fees was non refundable.

Explanation

Revenue Recognition Principle states that the revenue should be recorded only when the goods or services are sold and delivered to the customer and the value of goods or service is determinable and collection of the money is not doubtful...

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