Question

Problem 3 (10 points) Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $300 ($300/12 = $25 per month); a two-year membership costs $576 ($576/24 = $24 per month). Cash payment is required at the beginning of the membership. On July 1, Year 1, Kathy sold a one-year membership and a two-year membership. Assume both customers started using the memberships on July 1, Year 1. a. Determine the amount of income Kathy recognizes in Year 2 from the one-year contract b. Determine the amount of income Kathy recognizes in Year 2 from the two-year contract

Answer 1

Working Notes:
	Amount received from one year membership =	$                        300
	Per Month membership =	$                          25
	Amount received from Two year membership =	$                        576
	Per Month membership =	$                          24
	both Membership is taken as on july 1 of year
	Period expired in year 1 = from July 1 to Dec 31 =	6 Months
Solution: A
	Calculation of income from one - year contract in year 2
	Period expired in year 1from One - Year Contract	6 Months
	Period expired in year 2 from One - Year Contract	6 Months
	Multiply By	"X" By
	Revenue per month from one - year contract =	$                          25
	Total Income = $ 25 Per Month X 6 Monts =	$                        150
	Answer = $ 150
Solution: B
	Calculation of income from Two - year contract in year 2
	Period expired in year 1 from Two - year Contract	6 Months
	Period expired in year 2 from Two-year contract	12 Months
	Multiply By	"X" By
	Revenue per month from Two - year contract =	$                          24
	Total Income = $ 24 Per Month X 12 Monts =	$                        288
	Answer = $ 288