Revenue Recognition} Melaney Parks purchased HealthPlus Fitness in January 2018. Melaney wanted to increase the size of

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Revenue Recognition}

Melaney Parks purchased HealthPlus Fitness in January 2018. 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 2018,250 customers had purchased the three-year memberships using the loan provided by the bank.

Melaney prepared her statement of earnings for 2018 and included \(\$ 750,000\) ( \(\$ 3,000 \times 250\) 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 IFRS/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 2018 .

Required:

1. Write a short statement supporting either Melaney or the accountant in this dispute.

2. Would your answer change if the \(\$ 3,000\) fee were nonrefundable? Why or why not?

\section*{Case

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Related Book For  book-img-for-question

Cornerstones Of Financial Accounting

ISBN: 9780176707125

2nd Canadian Edition

Authors: Jay Rich, Jefferson Jones, Maryanne Mowen, Don Hansen, Donald Jones, Ralph Tassone

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