Southbench Athletic Club

Southbench Athletic Club (SAC) is a new athletic facility, located in Saskatoon, Saskatchewan. SAC is owned and operated by Harry Muscle, a former Olympic gold medalist in weightlifting. Harry decided to make his passion his business by opening open a local gym. SAC has the following mission statement:

"SAC provides the residents of Saskatoon the opportunity to live a healthier, happier, and longer life by providing affordable access to athletic equipment, aerobic classes, and specialized dieticians."

Harry borrowed $10 million from the bank in order to finance the required start-up investments in working capital and capital assets. Harry invested $2 million of his own money (that he earned through his career as a weightlifter and professional wrestler). The bank does not want the debt to equity ratio to exceed 5:1.

The first year of business has been a bit a rocky, as Harry's expertise is in weight training, as opposed to running a business. However, SAC was able to attract 5,000 people to purchase full memberships.

It was difficult to attract new members during the first few months of operations. In order to attract more members, Harry implemented the following creative marketing initiatives during the middle of the year:

Muscle Points?SAC offers its members 1 point per visit to the gym (maximum of 1 point per day). Muscle Points can be redeemed for free passes for a guest or for a free protein drink.

Initial Fee Return Guarantee?For three months, SAC provided new members with a guarantee period whereby their initial membership fee could be returned if they decide to discontinue their membership within the first year.

Free Membership Challenge?Members are entered into a draw every time they access the gym, and provided with a chance to win free membership fees for life.

Harry has come to you, Badami and Lusamba LLP, for assistance regarding the preparation of the December 31 year-end financial statements in accordance with ASPE. Harry knows how much cash came in from memberships, but is unsure about how much revenue should be recognized. In addition, Harry needs help understanding how the marketing initiatives impact the financial statement. Additional details on the marketing initiatives can be found in Exhibit I, which outlines your most recent discussion with Harry.

Exhibit I

Discussion with Harry Muscle

Memberships require a nonrefundable $500 initiation fee, followed by a monthly fee of $50. The monthly fee must be paid at the beginning of each month. The following is a monthly breakdown of the new memberships.