Question
Uncle Mikes is a discount club retailer that generates revenues from membership fees and selling products at discounted prices to its club members. To shop
Uncle Mike’s is a discount club retailer that generates revenues from membership fees and selling products at discounted prices to its club members. To shop at its stores, the customer must purchase a $40 annual membership, which expires on December 31. The cost of the membership is prorated over the remaining months of the year; for example, the cost of a membership purchased in July would be $20 ($40 × 6 months/12 months). However, the customer has the right to cancel the membership at any time during the year and receive a full refund of the membership fee originally paid at the end of the respective calendar quarter.
Based on historical data and industry averages, Uncle Mike’s estimates that 30% of its members will request a refund before the end of their membership period. Uncle Mike’s data for the past 10 years indicates that significant variations between actual and estimated cancellations have not occurred. Furthermore, Uncle Mike’s does not expect significant variations to occur in the foreseeable future.
During the calendar year ended December 31, 2008, Uncle Mike’s quarterly membership refunds were as follows: March $54,900; June $18,715; September $8,803; and December $4,667. Memberships issued during the year were:
Month | Number | Month | Number |
January | 2,000 | July | 500 |
February | 2,000 | August | 500 |
March | 1,500 | September | 1,000 |
April | 1,000 | October | 800 |
May | 900 | November | 900 |
June | 500 | December | 800 |
Required:
1. Prepare a schedule showing quarterly and annual membership fees earned by Uncle Mike’s during 2008.
2. How would you initially classify the membership fees in Uncle Mike’s financial statements?
3. How would your answer in requirement 1 change if Uncle Mike’s could not accurately predict membership refunds?
Step by Step Solution
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Step: 1
1 Quarterly membership fees earned by Uncle Mikes during 2008 March 54900 June 18715 September 8803 ...Get Instant Access to Expert-Tailored Solutions
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