If health club sells lifetime memberships for 5000 each that is not refundable, the owners would want the revenue to be recognized immediately. Is there an economic incentive to defer the membership revenue in accordance with SAB 101?© BrainMass Inc. brainmass.com October 24, 2018, 7:17 pm ad1c9bdddf
First, here is some background information regarding SAB 101:
AMID CONCERNS ABOUT IMPROPRIETIES, the SEC issued SAB 101, which provides guidance on recognizing, presenting and disclosing revenue in financial statements. The official implementation date is no later than the last quarter of fiscal years beginning after December 15, 1999
SAB 101 IS BASED ON THE PRINCIPLE that in companies' financial reporting, revenue should not be recognized until it is realized or realizable and earned. Before revenue is recognized, the following criteria must be met: persuasive evidence of an arrangement must exist; delivery must have occurred or services been rendered; the seller's price to the buyer must be fixed or determinable; and collectability should be reasonably assured.
The general economic incentive would be the reduction of taxes. While the health club has already received the cash related to the membership, by delaying recognition of that revenue, they can delay and minimize the amount of federal tax that would be associated with it.
The SEC ...
Revenue recognition: Identify the point of revenue recognition the five listed situations.
See attached problem
1. Identify point of revenue recognition.
The following independent situations require professional judgment for determining when to recognize revenue from the transactions.
Southwest Airlines sells you an advance-purchase airline ticket in September for your flight home at Christmas.
Ultimate Electronics sells you a home theatre on a "no money down, no interest, and no payments for one year" promotional deal.
The Toronto Blue Jays sell season tickets online to games in the Skydome. Fans can purchase the tickets at any time, although the season doesn't officially begin until April. The major League baseball season runs from April through October.
You borrow money in August from RBC Financial Group. The loan and the interest are repayable in full in November.
In August, you order a sweater from Sears using its online catalog. The sweater arrives in September, and you charge it to your Sears credit card. You receive and pay the Sears bill in October.
Identify when revenue should be recognized in each of the above situations.View Full Posting Details