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.

(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.

(c) Use the financial statement effects template to show the effect of the cash Costco received during 2006 for membership fees and the recognition of membership fees revenue for 2006. Use negative signs with your answers, when appropriate. Balance Sheet Liabilities + Contributed Capital + Earned Capital Income Statement - Expenses - Net Income Revenue Transaction ($ millions) Cash received for membership fees Membership fees earned Cash Asset + Noncash Assets = 1271 (c) Use the financial statement effects template to show the effect of the cash Costco received during 2006 for membership fees and the recognition of membership fees revenue for 2006. Use negative signs with your answers, when appropriate. Balance Sheet Liabilities + Contributed Capital + Earned Capital Income Statement - Expenses - Net Income Revenue Transaction ($ millions) Cash received for membership fees Membership fees earned Cash Asset + Noncash Assets = 1271