Analyzing Unearned Revenue Disclosures The following disclosures are from the August 30, 2009, annual report of Costco Wholesale Corporation. Revenue Recognition: We generally recognize sales, net of estimated returns, at the time the member takes possession of merchandise or receives services. When we collect payment from customers prior to the transfer of ownership of merchandise or the performance of services, the amount received is generally recorded as deferred revenue on the consolidated balance sheets until the sale or service is completed. Membership fee revenue represents annual membership fees paid by our members. We account for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period.

Revenue ($ millions)	52 weeks ended August 30, 2009	52 weeks ended August 31, 2008	52 weeks ended September 2, 2007
Net Sales	$69,889	$70,977	$63,088
Membership fees	1,533	1,506	1,313
Total revenue	$ 71,422	$ 72,483	$ 64,401

Current Liabilities ($ millions)	August 30, 2009	August 31, 2008
Short-term borrowings	$ 16	$ 134
Accounts payable	5,450	5,225
Accrued salaries and benefits	1,418	1,321
Accrued sales and other taxes	302	283
Deferred membership fees	824	748
Current potion of long-term debt	80	6
Other current liabilities	1,191	1,157
Total revenue	$ 9,281	$ 8,874

The components of the deferred tax assets and liabilities are as follows (in $ millions):

	August 30, 2009	August 31, 2008
Equity Compensation	$ 117	$ 98
Deferred income/membership fees	94	62
Excess foreign tax credits	--	4
Accrued liabilities and reserves	408	431
Other	48	59
Total deferred tax assets	667	654
Property and equipment	403	351
Merchandise inventories	184	146
Translation gain	--	5
Total deferred tax liabilities	587	502
Net deferred taxes	$ 80	$ 152

(a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?

When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.

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.

(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 2009 to compute the cash that Costco received during 2009 for membership fees. Total cash received (in $ millions) = $Answer (c) Use the financial statement effects template to show the effect of the cash Costco received during 2009 for membership fees and the recognition of membership fees revenue for 2009.

	Balance Sheet
Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Cash received for membership fees	Answer		Answer		Answer		Answer		Answer
Membership fees earned	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer
Answer		Answer		Answer

(d) Costco reports a deferred tax asset related to deferred income/membership fees. Explain in layman terms how this asset arises. When will Costco receive the benefit associated with this asset?

For financial reporting purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash after it reports the tax expense. This means that Costco must report GAAP revenue more quickly (in earlier periods) than for tax purposes. From this we can infer that the tax authorities use a cash basis for taxing membership fees.

For tax purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash before it reports the tax expense. This means that Costco must report GAAP revenue more slowly (in later periods) than for tax purposes. From this we can infer that Costco recognizes revenue from membership fees on a cash basis for book purposes.

For financial reporting purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash before it reports the tax expense. This means that Costco must report GAAP revenue more slowly (in later periods) than for tax purposes. From this we can infer that the tax authorities use a cash basis for taxing membership fees.

For tax purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash after it reports the tax expense. This means that Costco must report GAAP revenue more quickly (in later periods) than for tax purposes. From this we can infer that Costco recognizes revenue from membership fees on a cash basis for book purposes.