Case 5-76 REVENUE RECOGNITION Beth Rader purchased North Shore Health Club in June 2009. Beth wanted to increase the size of the business by selling five-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 2009, 250 customers had purchased the five-year memberships using the loan provided by the bank. Beth prepared her income statement for 2009 and included $250,000 as revenue because the Club had collected the entire amount in cash. Beth’s accountant objected to the inclusion of the entire $250,000. The accountant argued that the $250,000 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, Chap- ter 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 rea- sonably assured.’’ Beth notes that the memberships have been sold and that collection of the selling price has occurred. Therefore, she argues that all $250,000 is revenue in 2009. Write a short statement supporting either Beth or the accountant in this dispute.
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Case 5-76 REVENUE RECOGNITION
Beth Rader purchased North Shore Health Club in June 2009. Beth wanted to increase the size of the business by selling five-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 2009, 250 customers had purchased the five-year memberships using the loan provided by the bank.
Beth prepared her income statement for 2009 and included $250,000 as revenue because the Club had collected the entire amount in cash. Beth’s accountant objected to the inclusion of the entire $250,000. The accountant argued that the $250,000 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, Chap- ter 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 rea- sonably assured.’’
Beth notes that the memberships have been sold and that collection of the selling price has occurred. Therefore, she argues that all $250,000 is revenue in 2009.
Write a short statement supporting either Beth or the accountant in this dispute.
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