Question:
Mega Fitness, Inc., operates fitness centers throughout the Western states. Members pay a nonrefundable,
initial fee of $100, as well as a monthly fee of $40. As an option, a member could reduce the monthly fee
to $30 by increasing the initial fee to $300. The monthly fee is billed to the member near the end of each
month and is due by the 15th of the following month. The only cost incurred by Mega when a new
member joins a center is the cost of issuing a laminated identification card with the member’s picture.
The card costs $3 to produce.
Required:
When should Mega Fitness recognize revenue for the initial fee and for the monthly fee?
Answer:
Mega should recognize revenue for the initial fee equally over the estimated average period members
will continue to be members. Even though the fee is nonrefundable, it is not “earned” until services are
provided. Since there is no contractual period of service, it must be estimated. Mega would be justified in
recognizing only $3 of the initial fee immediately to offset the cost of the membership card. The payment
option chosen by members does not affect the revenue recognition policy.
The monthly fee should be recognized as revenue upon billing, as long as adequate provision is made for
possible uncollectible amounts.
Mega Fitness, Inc., operates fitness centers throughout the Western states. Members pay a nonrefundable,
initial fee of $100, as well as a monthly fee of $40. As an option, a member could reduce the monthly fee
to $30 by increasing the initial fee to $300. The monthly fee is billed to the member near the end of each
month and is due by the 15th of the following month. The only cost incurred by Mega when a new
member joins a center is the cost of issuing a laminated identification card with the member’s picture.
The card costs $3 to produce.
Required:
When should Mega Fitness recognize revenue for the initial fee and for the monthly fee?
Answer:
Mega should recognize revenue for the initial fee equally over the estimated average period members
will continue to be members. Even though the fee is nonrefundable, it is not “earned” until services are
provided. Since there is no contractual period of service, it must be estimated. Mega would be justified in
recognizing only $3 of the initial fee immediately to offset the cost of the membership card. The payment
option chosen by members does not affect the revenue recognition policy.
The monthly fee should be recognized as revenue upon billing, as long as adequate provision is made for
possible uncollectible amounts.
