Analyzing Unearned Revenue Disclosures The following disclosures are from the September 2, 2007, 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 ($ millions) Net Sales Membership fees Total revenue 52 weeks ended 52 weeks ended 52 weeks ended September 2, 2007 September 3, 2006 August 28, 2005 $63,088 $58,963 $51,879 1,312 1,188 1,073 $ 64,400 $ 60,151 $ 52,952 Current Liabilities ($ millions) September 2, 2007 September 3, 2006 Short-term borrowings $ 54 $ 41 Accounts payable 5,125 4,581 Accrued salaries and benefits 1,227 1,080 Accrued sales and other taxes 268 324 Deferred membership fees 692 584 Current potion of long-term debt 60 309 Other current liabilities 1,156 899 Total revenue $ 8,582 $ 7,818 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. When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year. 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. (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 2007 to compute the cash that Costco received during 2007 for membership fees. Total cash received (in $ millions) = $ 0 (c) Use the financial statement effects template to show the effect of the cash Costco received during 2007 for membership fees and the recognition of membership fees revenue for 2007. Use negative signs with your answers, when appropriate. Balance Sheet Income Statement Transaction ($ millions) Cash Asset + Noncash Assets = Liabilities + Contributed Capital + Earned Capital Revenue - Expenses = Net Income Cash received for membership fees Membership fees earned 0 Check