Question

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 $1,000 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 $1,080, 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.

1. 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 book 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 the facilities for a single day.

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 Fit 50 book.

Answer 1

Performance obligation refers to the promise to transfer a good or provide a service. For the allocation of revenue, it is important to identify performance obligations involved. In the first case, 2 performance obligations are involved which are used to recognize revenue. They are Yoga discount Voucher and Gym membership.

Part 1 A & B

Item description	Performance obligations?	Stand alone price	Percentage of total stand alone price
Yoga discount voucher	Yes	45	4% (45/1125)
Gym membership	Yes	1080	96% (1080/1125)
Total stand alone price		1125	100%
Item description	Percentage of total stand alone price	Total transaction price	Allocated contract price
Yoga discount voucher	4%	1000	40
Gym membership	96%	1000	960
Total contract price			1000

Stand-alone selling price of yoga discount option = actual value of yoga discount rate*value of one-year enrollment in yoga classes* rate of vouchers redemption = (30%-10%)*450*50% = $45

Part 1 C

Transaction	General journal	Debit	Credit
1	Cash	1000
	Deferred revenue ­ membership fees		960
	Deferred revenue ­ yoga coupon		40

In case 2, there is only one performance obligation involved and it is Fit 80 because the fees for it are received in advance. Hence it becomes a performance obligation.

Part 2 A & B

Item description	Performance obligations?	Stand alone price	Percentage of total stand alone price
Fit 50	Yes	450	100% (450/450)
Additional gym visits	No		0% (0/450)
Total stand alone price		450	100%
Item description	Percentage of total stand alone price	Total transaction price	Allocated contract price
Fit 50	100%	450	450
Additional gym visits			0
Total contract price			450

Part 2 C

Transaction	General journal	Debit	Credit
1	Cash	450
	Deferred revenue - coupon books		450