You are the accountant for Jolly Fitness, a health club. The business owner is concerned about low revenue. There are 3 situations related to this club:
- The membership fees are due in the beginning of the year and are collected in advance. They have 4 clubs in the vicinity, and the members can use any of these facilities. To attract more members, they also allow them to cancel the membership with a full refund for the unused months.
- Some customers only want to attend classes like kickboxing, spinning, and aerobics; they do not want to become members. Therefore, the club sells coupon books that have 25 coupons. If the customers do not use these coupons by the end of the year, they will expire.
- Jolly Fitness also makes its own fitness machines. It sells these machines to the customers with 30% down and a 2-year payment plan. However, customers can return the machine with a full refund within 90 days. It also provides servicing on this equipment, and historically 6% of the machines sold will have repair services.
Because of low revenue, the business owner is looking for some business loans to finance these transactions. He asks you, his accountant, to go ahead and recognize the revenue related to the membership dues, the revenue from the coupon books sold, and the machines that have been sold as well. You are concerned because you know that this is against GAAP principles.
- For each situation, explain to the business owner the following:
- How he is violating the GAAP principles of revenue recognition
- How the revenue should be recognized.