Revenue Recognition Melaney Parks purchased HealthPlus Fitness in January 2022. Melaney wanted to increase the size of the business by selling three-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 $3,000 installment loan to prospective members. By the end of 2022, 250 customers had purchased the three-year memberships using the loan provided by the bank. Melaney prepared her statement of earnings for 2022 and included $750,000 ($3,000 × 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 with a quotation from ASPE: 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. Melaney notes that memberships have been sold and the collection of the selling price has occurred. Therefore, she argues, all $750,000 is revenue in 2022. Write a short statement supporting either Melaney or the accountant in this dispute. Would your answer change if the $3,000 fee were nonrefundable?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Revenue Recognition
Melaney Parks purchased HealthPlus Fitness in January 2022. Melaney wanted to increase the size of the business by selling three-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 $3,000 installment loan to prospective members. By the end of 2022, 250 customers had purchased the three-year memberships using the loan provided by the bank.
Melaney prepared her statement of earnings for 2022 and included $750,000 ($3,000 × 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 with a quotation from ASPE:
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.
Melaney notes that memberships have been sold and the collection of the selling price has occurred. Therefore, she argues, all $750,000 is revenue in 2022.
Write a short statement supporting either Melaney or the accountant in this dispute.
Would your answer change if the $3,000 fee were nonrefundable?
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