The annual report of Costco Wholesale Corporation for fiscal year ended Septembe 1,2013 ncludes the following footnote (excerpted) Revenue Recogn The Company generally recognizes sales, which include shipping fees where applicable, net of estimated returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from customers prior to the transfer of ownership of merchandise or the performance o services, the amounts received are generally recorded as deferred sales, included in other current liabilities on the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns. net of the estimated net realizable value of nventories to be returned and any estimated disposition costs. Amounts collected from merchandise which under common trade practices are referred to as sales taxes, are recorded on a net basis memb evaluates whether it is appropriate to record the gross amount of merchandise sales and related The Company costs or the net amount earned as commissions. Generally, when Costco is the primary obligor, is subject to nventory risk, has latitude in establishing prices and selecting suppliers, can influence produc or service specifications, or has several but not all of these indicators, revenue and relat shipping fees are recorded on of gross other indicator a gross basis. If the Company is not the primary obligor and does not pos reporting as noted above, it records the net amounts as commissions earned, which is reflected in net sales The Company accounts for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period. The Company's Executive Members qualify for a 2% reward (up to a maximum of $750 per year on qualified purchases), which can be redeemed at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and member rewards on the consolidated balance sheets) are corresponding liability classified as accrued computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $970, $900, and $790 in 2013, 2012, and 2011, respectively Required a. Explain in plain English how Costco recognizes the cash received from customers who purchase goods or services b. What are "sales returns" and how does Costco record them in their financial statements? c. Explain in plain English how Costco recognizes revenue from annual memberships d. Assume that on September 1, 2013, Costco collected $7,200 in membership fees from customers Use the financial statements effects template that follows to show how Costco would record this transaction and what accounting adjustment Costco would record on November 30, 2013 e. Costco is contemplating adding a fitness facility to its warehouses customers would pay a monthly fee to use fitness equipment and take classes. How would Costco record monthly fees from customers if Costco runs the facility itself, that is, Costco purchases all the equipment and the fitness facility is staffed entirely by Costco employees? How would Costco record revenue if the company sub-contracts the fitness facility to a third-party operator and receives a percentage of monthly customer fees from the sub-contractor? Balance Sheet Noncash Liab Contrib Earned Rev Cash Expen Net Transaction Assets Capita Capita Asset ties enues ncome Sept. 1, 2013 Nov. 30, 2013