Question

Big Biceps Ltd (BB) is a company that operates a number of fitness centers (‘gyms’). The company is currently offering potential customers a new gym membership. The terms of the new membership are:

A) For an up-front cash payment of $900, new members will have full access to all training facilities at a nominated gym for a 12-month period. The $900 fee is non- refundable. A 12-month gym membership alone is normally priced at $960.

B) In addition, for the first three months of their membership, new members will receive ‘free’ access once a week to a half-hour individual session with a personal trainer. Three months of such personal training sessions would normally cost member $420.

C) As an added incentive, all new members who attend all of their sessions with the personal trainer in the first two months will receive a ‘free’ set of training weights at the end of that two-month period. BB’s prior experience with such offers is that all members receive the ‘bonus’ items at the end of the qualifying period. The training weights normally have a retail price of $80.

Required

1) Apply the five-step model in AASB 15 to the above facts to decide when the revenue will be recognised by BB for the above gym membership offer. Please provide a table to show the allocation of the transaction price. Round percentages to zero decimal places.

2) Assume D. Friday takes up the new gym membership offer from BB. She pays the membership fee on 1 July 2019. Further assume that BB has adopted AASB 15 and prepares monthly financial statements. What general journal entry(ies) should BB recognise on (a) July 2019 and (b) 31 August 2019?

Answer 1

1) AASB has introduced five step revenue recognition model which is on being applied to given situation states:

Step 1: Identify contract with the customer - Here when a client pays $900 for the entire year in cash and become a new member , he enters into a contract with the Gym availing access to training facilities in return.

Step2 :Identify the performance obligation in the contract : Performance obligations are the promises made in a contract and goods & services are distinct in nature. The promises made here are giving full access to training facilities to all members . Along with this, free access once a week half hour individual session with personal trainer for first 3 months and one who attended these sessions for first 2 months will get free set of training weights.

Step 3: Determine the transaction Price : Transaction Price is based on the amount of consideration which a seller is entitled to receive in exchange of promised goods under expected value method:

If client pays $ 900 in cash for 12months period then transaction price is $900

Step4:Allocate the transaction price to specific activity

• If client does not fulfill above criteria then transaction price is	$
  12 month membership	960
  Personal trainer for 12 months (420*4)	1680
  Training weights	80
  Total	2720

Step5: Recognise revenue when performance obligation is satisfied: Recognise it over period during which customer is expected to benefit from not having to pay a fee upon renewal .

2) Journal entry

July 19 Cash a/c Dr. 900

To contract liability A/c 900

( Being contract liability incurred & cash received)

Aug 2019 Contract liability a/c Dr. 900

To Profit & loss a/c 900