In: Accounting
The Quick Pass CPA Review Co., charges $10,000 for its review classes, and offers a money-back guarantee, if the student does not pass on the first try. The company collected $500,000 from students in its first class, which was held from July through October of 2019. Since the grades of the students on the November test will not be known until January 2020, the owner of Quick Pass intends to not recognize any income until the number of students who actually passed is known, so that he can report income and refund in the same year. What is your advice to your client?
Some contracts with customers may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a periodic basis that is specified in the contract. An entity shall apply this Standard to the duration of the contract (ie the contractual period) in which the parties to the contract have present enforceable rights and obligations.
an entity shall recognise a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received (or receivable) for which the entity does not expect to be entitled (i.e. amounts not included in the transaction price). The refund liability (and corresponding change in the transaction price and, therefore, the contract liability) shall be updated at the end of each reporting period for changes in circumstances.
To account for the transfer of some services that are provided subject to a refund), an entity shall recognise all of the following: (a) revenue for the transferred service in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognised for the services expected to be refunded); (b) a refund liability; and (c) an asset (and corresponding adjustment to cost of service) for its right to recover from customers on settling the refund liability(ifany).
An entity shall be determine the amount of consideration to which the entity expects to be entitled (i.e. excluding the expected to be refund to students).
For any amounts received (or receivable) for which an entity does not expect to be entitled, the entity shall not recognise revenue when it transfers service to customers but shall recognise those amounts received (or receivable) as a refund liability. Subsequently, at the end of reporting period, the entity shall update its assessment of amounts for which it expects to be entitled in refund to students and make a corresponding change to the transaction price and, therefore, in the amount of revenue recognised