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Hathway Health: convert projected cash basis to accrual

Hathway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $366 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statement for Years 2 and 3.

Cash-basis income statements:

Year1 Year2 Year3
-------------------------------------------------------------------------
Sales $366,000 $90,000 $90,000
-------- ------- -------
Equipment* $100,000 $ 0 $ 0
Salaries and Wages 50,000 50,000 50,000
Advertising 5,000 5,000 5,000
Rent and Utilities 36,000 36,000 36,000
-------- ------ ------
Net Income (loss) $175,000 $(1,000) $(1,000)

*Equipment was purchased at he beginning of year 1 for $100,000 and is expected to lat for three years and then to be worth $1,000.

Required:

1. Convert the income statements for each of the three years to the accrual basis.

2. Describe how the revenue recognition principle applies. Do you believe that the cash-basis or the accrual-basis income statements are more useful to management? to investors? Why?

Solution Preview

See attached table in Word

Hathway Health Club
Projected Income Statements

Year 1 Year 2 Year 3
Sales - Year 1 122000 122000 122000
Sales - Year 2 - 30000 30000
Sales - Year 3 - - 30000
Total Sales 122000 152000 182000

Equipment 33000 33000 33000
Salaries 50000 50000 50000
Advertising 5000 5000 5000
Rent and utilities 36000 36000 36000
Total ...

Solution Summary

The solution shows three years of projected income statements on an accrual basis, plus five notes of explanation for better understanding.

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