Question

Grocery Plus Members is a business that delivers groceries. When a new member is signed signs for membership, there is an agreement to one time joining fee (to start the account) as well as additional monthly payments to get deliveries made that are collected later. Using the balance sheet please answer these questions.

1. At end of the Year 2017 , what is the total value of club memberships that Grocery Plus Members had paid but that the company had not yet recognized as revenue?

2. What is the current ratio at end of Year 2017? How do you get his?

   1. What current ration would it be if Grocery Plus Members recognized all this revenue immediately instead of deferring?

                                                       

                                                  

  
YEAR 2017 YEAR 2016 ASSETS Current assets: Cash and equivalents Short-term investments Other current assets $ 60,000 200,000 30,000 $ 40,000 160,000 30,000 Total current assets 290,000 230,000 Long-term Assets: Property and equipment, net of accum. depr. Intangible assets Deferred membership origination costs Other assets Total long-term assets 350,000 101,000 98,000 270,000 310,000 100,000 85,000 210,000 819,000 705,000 $1,109,000 $ 935,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Income taxes payable Accrued liabilities Current maturities of long-term debt Deferred revenues Total current liabilities $ 40,000 $ 36,000 3,000 2,000 68,000 55,000 6,000 27,000 280,000 270,000 397,000 390,000 Long-term Liabilities Long-term debt, less current maturities Other liabilities Deferred revenues Total Long-term Liabilities 485,000 7,000 79,000 571,000 406,000 7,500 90,100 503,600 Stockholder's Equity 141,000 41,400 $1,109,000 $ 935,000 Grocery Members REVENUE RECOGNITION This is a monthly dues membership, which allows grocery members to go month to month with its fees after paying the initial joining fee. The Revenue from initial membership fees are deferred and recognized rateably over the weighted average expected life of the memberships. Costs directly related to the origination of memberships are also deferred andare amortized using the same methodology as for initial membership fees described above.

Answer 1

a) Total value of club memberships that Grocery Plus Members had paid but that the company had not yet recognized as revenue is $ 13000 i.e the difference between previous year's and current year's membership origination fees

b) current ratio for year 2017 = current assets/current liabilities

= 290000/397000

= 0.73

c) current ratio if defered revenue recongnized = 290000/ (397000-280000)

= 2.48