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Revenue Recognition Beth Rader purchased North Shore Health Club in June 2019. Beth wanted to increase the size of the business by selling 5-year memberships for $2,000, payable at the beginning of the membership period. The normal yearly membership fee is $500. Since few prospective members were expected to have $2,000, Beth arranged for a local bank to provide a $2,000 installment loan to prospective members. By the end of 2019, 250 customers had purchased the 5-year memberships using the loan provided by the bank. Beth prepared her income statement for 2019 and included $500,000 as revenue because the club had collected the entire amount in cash. Beth’s accountant objected to the inclusion of the entire $500,000. The accountant argued that the $500,000 should be recognized as revenue as the club provides services for these members during the membership period. Beth countered with a quotation from a part of "Generally Accepted Accounting Principles," Accounting Research Bulletin 43, Chapter 1, Section A, No. 1: "Profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that collection of the sale price is not reasonably assured.” Beth notes that the memberships have been sold and that collection of the selling price has occurred. Therefore, she argues that all $500,000 is revenue in 2019. Required: Write a short statement supporting either Beth or the accountant in this dispute.

BuyFind

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881
BuyFind

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
Publisher: Cengage Learning
ISBN: 9781337690881

Solutions

Chapter
Section
Chapter 5, Problem 91C
Textbook Problem

Revenue Recognition

Beth Rader purchased North Shore Health Club in June 2019. Beth wanted to increase the size of the business by selling 5-year memberships for $2,000, payable at the beginning of the membership period. The normal yearly membership fee is $500. Since few prospective members were expected to have $2,000, Beth arranged for a local bank to provide a $2,000 installment loan to prospective members. By the end of 2019, 250 customers had purchased the 5-year memberships using the loan provided by the bank.

Beth prepared her income statement for 2019 and included $500,000 as revenue because the club had collected the entire amount in cash. Beth’s accountant objected to the inclusion of the entire $500,000. The accountant argued that the $500,000 should be recognized as revenue as the club provides services for these members during the membership period. Beth countered with a quotation from a part of "Generally Accepted Accounting Principles," Accounting Research

Bulletin 43, Chapter 1, Section A, No. 1:

"Profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that collection of the sale price is not reasonably assured.”

Beth notes that the memberships have been sold and that collection of the selling price has occurred. Therefore, she argues that all $500,000 is revenue in 2019.

Required:

Write a short statement supporting either Beth or the accountant in this dispute.

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Chapter 5 Solutions

Cornerstones of Financial Accounting
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