(Revenue Recognition—Membership Fees) Midwest Health Club offers one-year memberships.

Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, MHC advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result of this policy, Stanley Hack, corporate controller, recognized revenue ratably over the life of the membership.

MHC is in the process of preparing its year-end financial statements. Phyllis Cavaretta, MHC’s treasurer, is concerned about the company’s lackluster performance this year. She reviews the financial statements Hack prepared and tells Hack to recognize membership revenue when the fees are received.

Instructions Answer the following questions.

(a) What are the ethical issues involved?

(b) What should Hack do?