Analyzing Unearned Revenue Disclosures The following disclosures are from the August 31, 2008, annual report of Costco Wholesale Corporation. Revenue Recognition: Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. The Company accounts for membership fee revenue on a deferred basis, whereby revenue is recognized ratably over the one-year term of the membership period. Revenue 52 weeks ended 52 weeks ended 52 weeks ended (5 millions) August 31, 2008 September 2, 2007 September 3. 2006 Net Sales $70.977 $63,088 $58.963 Membership fees 1.506 1.312 Total revenue $ 72,483 $ 64,400 $ 60.151 1.188 Support $ 54 Current Liabilities (5 millions) August 31, 2008 September 2, 2007 Short-term borrowings Accounts payable 5.225 Accrued salaries and benefits 1,321 Accrued sales and other taxes 283 268 Deferred membership fees 748 692 Current potion of long-term debt Other current liabilities 1.157 1.156 Total revenue $ 8.874 $8.582 60 (a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees? Because Costco does not know how many of its members will continue to the end of the year, cash received from members is recorded as a liability and recognized as revenue only at year-end. The company records revenue when the cash is received. Because Costco has a refund policy, the company records revenue when the cash is received, less an allowance for expected membership terminations. When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year, Support (b) Use the balance sheet information on Costco's Deferred Membership Fees liability account and its income statement revenues related to Membership Fees earned during 2008 to compute the cash that Costco received during 2008 for membership fees. Total cash received (in 5 millions) = $ 0 (c) Use the financial statement effects template to show the effect of the cash Costco received during 2008 for membership fees and the recognition of membership fees revenue for 2008 Use negative signs with answers, when appropriate. (c) Use the financial statement effects template to show the effect of the cash Costco received during 2008 for membership fees and the recognition of membership fees revenue for 2008. Use negative signs with answers, when appropriate. Balance Sheet Transaction (5 millions) Cash Asset Noncash Assets - Liabilities + Contributed Capital + Earned Capital Cash received for membership fees Membership fees earned Revenge Toddns ncial statement effects template to show the effect of the cash Costco received during 2008 for es and the recognition of membership fees revenue for 2008. gns with answers, when appropriate. Balance Sheet Income Statement loncash Assets = Liabilities + Contributed Capital + Earned Capital Revenue - Expenses = Net Income ORIO OTA ORIRED