Problem:
The Point Athletic Club offers one-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, The Point advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result of this policy, Kevin Harrison, corporate controller, recognized revenue ratably over the life of the membership.
The Point is in the process of preparing its year-end financial statements. Rodney Williams, The Point's operations manager, is concerned about the company performance this year. He reviews the financial statements Kevin prepared and tells him to recognize membership revenue when the fees are received.
Respond to the following questions:
1. What are the ethical issues in this situation?
2. What arguments can you make for recognizing revenue at the time of sale?
3. What do you think Kevin should do?