Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
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.


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

To determine

Revenue recognition:

Revenue recognition on the accrual accounting basis is done when the amount is received or receivable and the services are provided i.e. the revenue is earned and realized or realizable. In Accrual accounting system, the service revenue should be recognized as and when the services are performed or provided.

The short statement in support of either Beth or the accountant in the dispute.


In the given case, it is given that Beth Rader purchased a club named North Shore Health Club in June 2019. In order to increase the business, Beth offered it’s 5 year membership for $2,000 payable at the start of membership period. The normal fee is $500. Although few members are capable of paying the amount of $2,000 but Beth arranged a facility of loan from local bank to provide $2,000 instalment loan. This results the club in giving new 250 customers who paid by availing the facilities of loan

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