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Analyzing Unearned Revenue Disclosures The following disclosures (excerpted) are from the September 2, 2018, annual report of Costco Wholesale Corporation. The Company generally recognizes
Analyzing Unearned Revenue Disclosures The following disclosures (excerpted) are from the September 2, 2018, annual report of Costco Wholesale Corporation. The Company generally recognizes sales, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, u the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after givin effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,394, $1,281, and $1,172 in 2018, 2017, and 2016, respectively. Revenue ($ millions) Net Sales Membership fees Total revenue Sept. 2, 2018 Sept. 3, 2017 Aug. 28, 2016 $138,434 $126,172 $116,073 3,142 $141,576 2,853 2,646 $129,025 $118,719 Current Liabilities ($ millions) Sept. 2, 2018 Sept. 3, 2017 Accounts payable $11,237 $9,608 Accrued salaries and benefits 2,994 2,703 Accrued member rewards 1,057 961 Deferred membership fees 1,624 1,498 Other current liabilities Total current liabilities 3,014 $19,926 2,725 $17,495 (a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees? OBecause 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.
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