Consider the following independent situations: For each of these situations, describe the revenue recognition policy that you believe that they should follow, explaining the basis for your recommendation 1. An international health club sells lifetime memberships costing $1,500 which allow the purchaser unlimited use of any of the club's 300 facilities around the world. The initiation fee may be paid in 36 monthly installments, with a two percent interest charge on any unpaid balance. 2. Franklin Motors, Inc., has always offered a limited, 36-month warranty on its cars and trucks, but to counter the significant competition in the industry, the company has come to the conclusion that it must do something more. With that in mind, the company developed a new warranty program: For a $1,500 payment at the time of purchase, a customer can buy a seven-year warranty that will cover replacement of almost all parts and labor. The purchased warranty expires at the end of seven years or when the customer sells the vehicle, whichever occurs first. 3. Chandler Promotions Inc. sells coupon books that give the holder a ten percent discount at any of 50 participating merchants. The buyer of the coupon book pays $25 for the book but can realize up to $500 in savings. Chandler convinces merchants to participate in the program at no cost, arguing that participation will build customer traffic and will create the opportunity for repeat business from the coupon book-holders. 4. Comfort Furniture sells household furniture. Customers can pay for the furniture at the time of delivery or they can wait one year to make payment. In the latter case, the customer must pay for the retail price of the furniture plus an additional 16 percent. If the customer decides to pay after one year, should Comfort Furniture report the additional 16 percent as part of the revenue from selling the furniture or should it be reported separately? Assume that the ability to collect the receivable is not an issue. 5. Local News, Inc., prints and distributes a weekly newspaper throughout the city. Local stores order a certain number of the papers each week and pay for them on delivery. Local News always takes back any unsold papers and gives the merchant a credit toward future purchases.
Consider the following independent situations:
For each of these situations, describe the revenue recognition policy that you believe that they should follow, explaining the basis for your recommendation
1. An international health club sells lifetime memberships costing $1,500 which allow the purchaser unlimited use of any of the club's 300 facilities around the world. The initiation fee may be paid in 36 monthly installments, with a two percent interest charge on any unpaid balance.
2. Franklin Motors, Inc., has always offered a limited, 36-month warranty on its cars and trucks, but to counter the significant competition in the industry, the company has come to the conclusion that it must do something more. With that in mind, the company developed a new warranty program: For a $1,500 payment at the time of purchase, a customer can buy a seven-year warranty that will cover replacement of almost all parts and labor. The purchased warranty expires at the end of seven years or when the customer sells the vehicle, whichever occurs first.
3. Chandler Promotions Inc. sells coupon books that give the holder a ten percent discount at any of 50 participating merchants. The buyer of the coupon book pays $25 for the book but can realize up to $500 in savings. Chandler convinces merchants to participate in the program at no cost, arguing that participation will build customer traffic and will create the opportunity for repeat business from the coupon book-holders.
4. Comfort Furniture sells household furniture. Customers can pay for the furniture at the time of delivery or they can wait one year to make payment. In the latter case, the customer must pay for the retail price of the furniture plus an additional 16 percent. If the customer decides to pay after one year, should Comfort Furniture report the additional 16 percent as part of the revenue from selling the furniture or should it be reported separately? Assume that the ability to collect the receivable is not an issue.
5. Local News, Inc., prints and distributes a weekly newspaper throughout the city. Local stores order a certain number of the papers each week and pay for them on delivery. Local News always takes back any unsold papers and gives the merchant a credit toward future purchases.
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