Question

Revenue is ordinarily recognized at the point of sale or exchange, when the earnings process is complete and the when the amount of revenue can be objectively measured. For most businesses these tests are met when merchandise sold or services rendered. Like many rules, the revenue recognition principle has exceptions in some unique cases, like long term construction projects, certain farm products or precious stones.

Consider the America Health Fitness Club that sells lifetime memberships for $1,000 each. Lifetime members are entitled to use of the facilities for the remainder of their lives. America's experience and research shows that 70% of lifetime members stop attending and no longer use the facilities after approximately 5 years. Another 20% use the facilities for approximately 3 years, and the remaining 10% continue to visit the health club throughout their lives.

When do you believe a $1,000 receipt from a lifetime member should be recognized as revenue? Justify your answer.

Answer 1

#Lifetime membership fees is not a Revenue. It's a capital reciept( a balance sheet item) and it was added to capital fund on liabilities side

Revenue is a Gross inflow of ,

• Cash
• Receivables ; or
• Other considerations , in ordinary course of business from

1. Sale of goods
2. Rendering of services
3. Other income

# Generally, For Annual membership fees permits only membership to the member , recognise when it is received.

# If the membership fees entitles the membership and other services or publication during the year , it should be recognised on a systematic and rational basis by considering timing and nature of all services provided .

Here Lifemembership fees is not a annual membership. It's a one-time fee for life time. So, it was not recognised as a Revenue. And it will be added to capital fund of balance sheet

So In the case of American health Fitness club should recognise that $1000 each in addition to their capital fund in balance sheet, on the relevent same year when they received. It was irrelevant whether customer uses his membership or not. The answer will be same .