oct24class - Revenue Recognition When and How Realization...

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Unformatted text preview: Revenue Recognition: When and How? Realization Principle Record revenue when: AND There is reasonable certainty as to the collectibility of the asset to be received (usually cash). The earnings process is complete or virtually complete. SEC Staff Accounting Bulletin No. 101 The SEC issued Staff Accounting Bulletin No. 101 to crackdown on earnings management. The bulletin provides additional guidance to determine if the realization principle is satisfied: 1. Persuasive evidence of an arrangement exists. 2. Delivery has occurred or services have been performed. 3. The seller’s price to the buyer is fixed or determinable. 4. Collectibility is reasonably assured. Case 5-3 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? When should Mega Fitness recognize revenue for the initial fee and for the monthly fee? 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. initial fee immediately to offset the cost of the membership card....
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oct24class - Revenue Recognition When and How Realization...

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