Question

20 Hour Fitness sells 2 year gym fitness memberships at Costco for $1,200. On 9/21/20 - Dave purchased a 2 year membership at Costco and received a voucher for a two hour membership at 20 hour fitness. CostCo forwarded the $1200 to 20 Hour Fitness on 10/2. On 11/1/20 Dave went to his local 24 hour, turned in his voucher and received his official membership card that will allow him to enter the gym for the next 2 years. When should 24 hour fitness recognize revenue on the membership? Use appropriate concepts and criterions in the IRAC format. Essay Toolbar navigation B I US 를 들 들 lül III A А

Answer 1

Issue: Timing of recognition of revenue on sale of a membership voucher via a third party

Rule: The 5-step revenue model prescribes the method of recognizing revenue from contracts with customers.

Step 1: Identify the contract

Step 2: Identify the performance obligation

Step 3: Determine transaction price

Step 4: Allocate transaction price

Step 5: Recognize revenue

Analysis

Dave has entered into a valid contract with 20 Hour Fitness bu purchasing the 2 year fitness membership from Costco. This transaction created enforcable rights and obligations. 20 Hour Fitness's performance obligation is to provide gym services to Dave for 2 years in exchange of the $1,200 paid by him. Thus, the transaction price of $1,200 is allocated to the single performance obligation of providing gym services for 2 years.

Recognition of revenue - Revenue is recognized when the customer obtains control of a good or service.

ASC 606-10-25-23 states that 'An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.' A customer obtains control of a good or service if it has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service.

The customer, Dave, simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, i.e. 20 Hour Fitness.

ASC 606 states that 'A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer.'

Conclusion

On receiving the official membership card on 11/1/20, 20 Hour Fitness has undertaken the obligation to provide 2 years of gym services to Dave. As a result, $1,200 should be recognized as revenue evenly over a period of 2 years starting from 11/1/20. Prior to that, 20 Hour Fitness must recognize a contract liability for $1,200.