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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
icon
Concept explainers
Question

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.

Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Completing the Accounting Cycle
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education