It is July 31 and the Slip-n-Slide Water Park Ltd. has just completed its first three months of operations. The company’s owners, Kelly and Derek Lurz, are very pleased with the results of operations and are trying to prepare the company’s first set of financial statements. You have been controller for a local firm for several years and are good friends with Kelly and Derek, so the couple approaches you with some questions about how certain items should be recorded in their financial statements.

Kelly: To promote the park and encourage people to bring their kids to it, we gave away 1,000 coupons for free ice cream cones at our canteen, to be redeemed any time during the summer. We usually charge $1.50 for an ice cream, but the cost is only $0.50 per cone. Two hundred of these coupons have been redeemed already. What should we report about the coupons that have been redeemed, and do we need to report anything about the 800 coupons that haven’t been used?

Derek: I can figure out how to record most revenues and expenses, but I don’t know how to treat the revenues associated with the 300 season passes that we sold in May and June. They were sold for $60 each and are good for June, July, and August. Holders of season passes have unlimited access to the park for these three months.

Kelly: The other problem we have is that we just took out a $60,000 bank loan. The 10-year loan agreement requires us to repay $500 of the principal of the loan each month, plus interest at the rate of 8%. Since we’ll be making payments on this loan in the next year, I think we should record the $60,000 as a current liability, but Derek thinks it should be recorded as a long-term liability, since it will be 10 years before it is fully repaid.

Required:

Provide the owners with advice on how each of these items should be recorded in the July 31 financial statements. Be sure to explain why they should report the items as you recommend.