Accounting for Membership Fees and Rewards Program

Costco Wholesale Corporation provides the following description of its revenue recognition policies for membership fees and rewards in its 10-K report dated August 31, 2014:

Membership fee revenue represents annual membership fees paid by substantially all of the Companys members. The Company accounts for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period. The Companys Executive Members qualify for a 2% reward (beginning November, 1, 2011 the reward increased from a maximum of $500 to $750 per year on qualified purchases), which can be redeemed at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $1,051, $970, and $900 in 2014, 2013, and 2012, respectively.

The following data were extracted from Costcos 2014 income statement and balance sheet:

a. Explain Costcos accounting for membership fees and rewards programs.

b. Prepare journal entries to record (1) membership fees collected in cash in fiscal 2014 and (2) membership fee revenue recognized in 2014.

c. Prepare journal entries to record (1) member rewards earned by executive members in fiscal 2014 and (2) rewards redeemed during the year.

S millions) 2014 2013 Revenue $110,212 $102,870 2,286 2,428 Current Liabilities 2,231 2,037 710 382 1,167 1,089 $14,412 $13,257 773 442 1,254 1,221 Accrued sales and other taxes. . . . . . .. . . . . .. _ _ _ . . . . _