Question

An Amazon Prime Customer pays an annual $99 membership fee covering services for the next twelve months. Similarly, a Costco customer pays an annual $55 membership fees covering the next twelve months. REQUIRED: How should Amazon and Costco account for these fees received in advance? Explain

Answer 1

The Amazon and costco should record annual membership fee received in advance as Unearned revenue on the date of receipt of such membership fee.

The membership fee received in advance ( Unearned Revenue ) should be transferred to Revenue over monthly basis calculated by dividing the number of months the advance was received.

The calculation will be as follows:-

	Amazon	Costco
Unearned Revenue at receipt of membership Fee	99.00	55.00
Transfer to revenue:
End of month 1	8.25	4.58
End of month 2	8.25	4.58
End of month 3	8.25	4.58
End of month 4	8.25	4.58
End of month 5	8.25	4.58
End of month 6	8.25	4.58
End of month 7	8.25	4.58
End of month 8	8.25	4.58
End of month 9	8.25	4.58
End of month 10	8.25	4.58
End of month 11	8.25	4.58
End of month 12	8.25	4.58
Total Revenue Recognized	99.00	55.00