The following disclosures $($excerpted$)$ are from the annual report of Costco Wholesale Corporation.

The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and member returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets.

The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis.

The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one$-$year membership period.

In most countries, the Company$$s Executive members qualify for a $2\%$ reward on qualified purchases, subject to an annual maximum value, which does not expire and is redeemable at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non$-$ redemptions $($breakage$),$ with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For the past three fiscal years, the net reduction in sales was $$2,307,$ $$2,047,$ and $$1,707$ respectively.

Revenue $($$ millions$)$ Current Year Prior Year Two Years Prior

Net sales $$222,730$ $$192,052$ $$163,220$

Membership fees $4,2243,8773,541$

Total revenue $$226,954$ $$195,929$ $$166,761$

Current Liabilities $($$ millions$)$ Current Year Prior Year

Accounts payable $$17,848$ $$16,278$

Accrued salaries and benefits $4,3814,090$

Accrued member rewards $1,9111,671$

Deferred membership fees $2,1742,042$

Current portion of long$-$term debt $73799$

Other current liabilities $5,6114,561$

Total current liabilities $$31,998$ $$29,441$

Required

a$.$ Explain in layman$$s terms how Costco accounts for the cash received for membership fees.

Costco receives cash for year$-$long memberships throughout the year. When it receives cash, the company records it as Answer $1$

unearned revenue

$.$

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 the current fiscal year to compute the cash Costco received during the current fiscal year for membership fees.

$($$ millions$)$

Cash received from membership fees in current year: Answer $2$

c$.$ Use the financial statement effects template to show the effect of the cash Costco received during the current fiscal year for membership fees and the recognition of membership fees revenue for the current fiscal year.

Note: Use negative signs with answers when appropriate.

Note: If an answer field is not needed, leave it blank $($not all answer fields will be used$).$

$($$ millions$)$ BALANCE SHEET INCOME STATEMENT

Cash Noncash Contributed Earned Net

Transaction Asset Assets Liabilities Capital Capital Revenue Expenses Income

Receive cash for membership fees Answer $3$

$0$

Answer $4$

$0$

Answer $5$

$0$

Answer $6$

$0$

Answer $7$

$0$

Answer $8$

$0$

Answer $9$

$0$

Answer $10$

$0$

Answer $11$

N$/$A

Answer $12$

N$/$A

Answer $13$

N$/$A

Answer $14$

N$/$A

Answer $15$

N$/$A

Answer $16$

N$/$A

Answer $17$

N$/$A

Recognize membership fees earned Answer $18$

$0$

Answer $19$

$0$

Answer $20$

$0$

Answer $21$

$0$

Answer $22$

$0$

Answer $23$

$0$

Answer $24$

$0$

Answer $25$

$0$

Answer $26$

N$/$A

Answer $27$

N$/$A

Answer $28$

N$/$A

Answer $29$

N$/$A

Answer $30$

N$/$A

Answer $31$

N$/$A

Answer $32$

N$/$A

d$.$ Explain in plain language the $$accrued member rewards$$ liability.

To build customer loyalty Costco offers $2\%$ reward to Executive members in certain countries. Every time an Executive member spends $$1,000,$ Costco records a liability of $Answer $33$

$0$

that it promises to give the customer later.

e$.$ Complete the following sentence. Costco recorded sales of at least $Answer $34$

$0$

from the Company's Executive members, during the current fiscal year.