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Case_-_Membership_Fees - cancellations have not occurred...

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MANAGEMENT 120A CASE 1 Revenue Recognition MEMBERSHIP FEES Objective: When should membership fees be recognized as revenue. Engineer Dan’s is a discount club electronic 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 x 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, Engineer Dan’s estimates that 30% of its members will request a refund before the end of their membership period. Engineer Dan’s data for the past 10 years indicates that significant variations between actual and estimated
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Unformatted text preview: cancellations have not occurred. Furthermore, Engineer Dan’s does not expect significant variations to occur in the foreseeable future. During the calendar year ended December 31, 2008, Engineer Dan’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 Requirements Prepare a letter to Engineer Dan’s regarding their revenue recognition policy and answer the following: 1. Prepare a schedule showing quarterly and annual membership fees earned by Engineer Dan’s during 2008. 2. How would you initially classify the membership fees in Engineer Dan’s financial statements? 3. How would your answer to requirement 1 change if Engineer Dan’s could not accurately predict membership refunds? Page | 1...
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