Question

Analyzing Unearned Revenue Disclosures
The following disclosures (excerpted) are from the September 2, 2018, annual report of Costco Wholesale Corporation.

The Company generally recognizes sales, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership.

The Company’s Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,394, $1,281, and $1,172 in 2018, 2017, and 2016, respectively.

Revenue ($ millions)	Sept. 2, 2018	Sept. 3, 2017	Aug. 28, 2016
Net Sales	$138,434	$126,172	$116,073
Membership fees	3,142	2,853	2,646
Total revenue	$141,576	$129,025	$118,719

Current Liabilities ($ millions)	Sept. 2, 2018	Sept. 3, 2017
Accounts payable	$11,237	$9,608
Accrued salaries and benefits	2,994	2,703
Accrued member rewards	1,057	961
Deferred membership fees	1,624	1,498
Other current liabilities	3,014	2,725
Total current liabilities	$19,926	$17,495

(a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?

Because Costco does not know how many of its members will continue to the end of the year, cash received from members is recorded as a liability and recognized as revenue only at year-end.

When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.

The company records revenue when the cash is received.

Because Costco has a refund policy, the company records revenue when the cash is received, less an allowance for expected membership terminations.

(b) Use the balance sheet information on Costco's Deferred Membership Fees liability account and its income statement revenues related to Membership Fees earned during fiscal 2018 to compute the cash that Costco received during fiscal 2018 for membership fees.
Total cash received (in $ millions) = $Answer

(c) Use the financial statement effects template to show the effect of the cash Costco received during fiscal 2018 for membership fees and the recognition of membership fees revenue for fiscal 2018.

Use negative signs with answers, when appropriate.

	Balance Sheet
Transaction ($ millions)	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Receive cash in advance for membership fees	Answer		Answer		Answer		Answer		Answer
Recognized membership fees earned	Answer		Answer		Answer		Answer		Answer

Income Statement
Revenue	-	Expenses	=	Net Income
Answer		Answer		Answer
Answer		Answer		Answer

(e) Complete the following sentences:
Costco recorded sales of at least $_____ from the Company’s Executive members, during fiscal 2018.

Answer 1

(a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?

Answer - When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.

(b) Use the balance sheet information on Costco's Deferred Membership Fees liability account and its income statement revenues related to Membership Fees earned during fiscal 2018 to compute the cash that Costco received during fiscal 2018 for membership fees.

answer - Opening Deferred membership fees balance + Cash received - Membership fee revenue recognized during the year = Closing Deferred membership fee balance

= $ 1498 + cash received- $3142 = $1624

Cash received = 3142 Million $ + 1624 Million $ - 1498 Million $

cash received = $ 3268

(c) =

Balance Sheet
Transaction ($ million)	Cash Asset	+	Non Cash Assets	=	Liabilities	+	Contributed Capital	+	Earned Capital
Cash received for membership fees	3268		-		3268		-		-
Membership fees earned	-		-		-3142		-		3142

Income Statement
	Revenue	-	Expenses	=	Net Income
	-		-		-
	3142		-		3142

e) here in 2018 reduction in sales are $1394

And reduction percent is 2% so sales are $1394/ 0.02= $ 69700