Question

In: Accounting

Fit & Slim (F&S) is a health club that offers members various gym services. Required: 1....

Fit & Slim (F&S) is a health club that offers members various gym services. Required: 1. Assume F&S offers a deal whereby enrolling in a new membership for $1000 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 30% off yoga classes for one year. The yoga classes are offered to gym members as well as to the general public. A new membership normally sells for $1080, and a one-year enrollment in yoga classes sells for an additional $450. F&S estimates that approximately 50% of the vouchers will be redeemed. F&S offers a 10% discount on all one-year enrollments in classes as part of its normal promotion strategy. a. & b. Indicate below whether each item is a separate performance obligation. For each separate performance obligation you have indicated, allocate a portion of the contract price. c. Prepare the journal entry to recognize revenue for the sale of a new membership.

2. Assume F&S offers a "Fit 50" coupon book with 50 prepaid visits over the next year. F&S has learned that Fit 50 purchasers make an average of 40 visits before the coupon book expires , A customer purchases a Fit 50 nook by paying $450 in advance, and for any additional visits over 50 during the year after the book is purchased, the customer can pay a $20 visitation fee per visit. F&S typically charges $20 to nonmembers who use facilities for a single day'

a. & b. Indicate below whether each item is a separate performance obligation. for each separate obligation you have indicated, allocate a portion of the contract price.

c. prepare the journal entry to recognize revenue for the sale of a new Fit 50 book

Solutions

Expert Solution

Performance Obligation, customer option for additional goods or service

Number of obligations is two

1) Unlimited access of facilities and classes

2) Special discount coupon

Conditions of performance obligations satisfied (at least one condition should fulfill)

- The customer should utilize the seller's work as it is performed

- The customer can control the assets at any stage

-Even though there is no other alternative of creating assets and cancel of contract, the seller can get his payment until its progress.

Here,

Discount is identifiable separately, but it is highly interrelated with providing access to fit and slim facilities. Seller is not responsible until it is created as a product. Therefore, discount qualifies as performance obligation.

Answer to 1

Given that,

Offer Price = $ 1000

Voucher Discount = 30%

New Membership = $ 1080

Yoga Membership = $ 450

Vouchers redeemed = 50%

Normal Discount = 10%

Answer to 1a)

Item Description Performance Obligation Stand Alone Price Percentage of Total Price
Yoga Discount Voucher Yes 135 11.11%
(450*30%)
Facilities Access 1080 88.89%
Total standalone price 1215

Answer to 1b)

Item Description Percentage of Total Price Transaction Price Allocated Contract Price ($)
Yoga Discount Voucher 11.11% 1000 111.11
(450*30%)
Facilities Access 88.89% 1000 888.89
Total Price 1000.00

Answer to 1c)

Sr. No.

Account Title and Explanation

Debit ($)

Credit ($)

1

Cash/Bank

1000

Deferred Revenue-Membership Fees

888.89

Deferred Revenue-Yoga Coupon

111.11

Answer to 2

There is only 1 performance obligation in "Fit 50" member deal. The "Fit 50" deal coupon book is a material right of entry of the gym. Therefore, this performance obligation is right of entry of F&S for 50 prepaid visits.

The right of gym for 50 prepaid visits is separate because it is both able of being distinct and separately identifiable from other goods/services of the contract.

Further, the price of additional visits over 50 visits is same as that charged to non members. Hence, not a performance obligation.

Answer to 2b

Since, there is only 1 performance obligation, there is no need to assign contract price to additional visits.

But, coupon book comprises 50 visits at price of $450.

Contract Price to each visit = 450/50 = $9

Answer to 2c

Sr. No.

Account Title and Explanation

Debit ($)

Credit ($)

1

Cash/Bank

450

Deferred Revenue-Membership Fees - Fit 50

450


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