Question: Melaney Parks purchased HealthPlus Fitness in January, 2011. Melaney wanted to increase he size of the business by selling three-year memberships for $3,000, payable at the beginning of the membership period. The normal yearly membership fee is $1,500. Since few prospective members were expected to want to spend $3,000 at the beginning of the membership period, Melaney arranged for a local bank to provide a $3,000 instalment loan to prospective members. By the end of 2011, 250 customers had purchased the three-year memberships using the loan provided by the bank.
Melaney prepared her income statement for 2011 and included $750,000 ($3,000*250 members) as revenue because the club had collected the entire amount in cash. Melaney's account objected to the inclusion of the entire $750,000. The accountant argued that the $750,000 should be recognized as revenue as the club provides services for these members during the membershipperiod. Melaney countered with a quotation from generally accepted accounting principlies:
Profit's deemed to be realized when sale in the ordinary course of business is effected, unless the circumstances are such that collection of the sale price is not reasonably assured.
Melaney notes that memberships have been sold and the collection of the selling price as occured. Therefore, she argues that all $750,000 is revenue in 2011.
Required: 1. Write a short memo to Melaney stating the proper accounting postion for recognition of the revenue in this situation.
2. If the $3,000 fee were nonrefundable, would your response to Melaney change? If so, why?