Question

Flex Fitness is a health and fitness club that operates gym facilities through out the United States.Flex Fitness members pay their membership dues annually.Selected fiscal- year information from the company's balance sheets follows(thousands).
Selected Balance Sheet Data
2016
Defered membership Income( liability)
500,568
2017
453,881
During fiscal 2016, Flex Fitness collected$1,119,833 cash for membership fees.Calculate the membership fee revenue that flex fitness recognizied during the year.

Answer 1

Flex Fitness is a club that uses the accrual accounting method. Revenue will only be recognized as and when earned. As money is received from a member as membership fee at the beginning of his membership and the services are yet to be provided, deferred revenue is recognised.

When a company accrues deferred revenue, it is because a buyer or customer paid in advance for a good or service that is to be delivered at some future date.

This deferred revenue shall be recognised as income as and when the services are provided.

In the question, we have been balances as on 2016 and 2017, it is impossible to compute the answer pertaining to 2016 with only these details. So for the purpose of answering, we have assumed that the given data is the opening balance of deferred revenue as on 2016 (i.e, closing balance of 2015) and as that of 2017 (i.e, closing balance of 2016) along with cash earned for 2016.

The total amount of deferred revenue pending as at opening of 2016 will be earned in the year 2016 as the period of provision of service is only one year (ie, memebership is for one year) and one year will elapse on completion of the year 2016. The opening deferred revenue as on 2017 will be the closing deferred revenue as on 2016. Therefore the revenue recognized for the year 2016 shall be computed as follows:

Revenue = Cash earned during the period - Closing Deferred revenue + Opening deferred revenue

= $ 1,119,833 - $ 453,881 + $ 500,568

= $ 1,166,520

(All the amounts are in thousands)