Recognizing Revenue
Response to the following problem:
The Ho Man Tin Tennis Club sells lifetime memberships for $20,000 each. A lifetime membership entitles a person to unlimited access to the club's tennis courts, weight room, exercise equipment, and swimming pool. Once a lifetime membership fee is paid, it is not refundable for any reason.
Judy Chan and her partners are the owners of Ho Man Tin Tennis Club. In order to overcome a cash shortage, they intend to seek investment funds from new partners. Judy and her partners are meeting with their accountant to provide information for preparation of financial statements. They are considering when they should recognize revenue from the sale of lifetime memberships.
Answer the following questions:
1. When should the lifetime membership fees be recognized as revenue? Remember, they are nonrefundable.
2. Interpretive Question: What incentives would Judy and her partners have for recognizing the entire amount of the lifetime membership fee as revenue at the time it is collected? Since the entire amount will ultimately be recognized anyway, what difference does the timing make?