An entity, a health club, enters into a one-year membership with a customer of low credit...

An entity, a health club, enters into a one-year membership with a customer of low credit quality. The transaction price of the contract is $120, and $10 is due at the beginning of each month. The standalone selling price of the monthly service is $10. The entity’s usual business practice for a customer of this credit quality is to require that the customer pay for each month of access in advance.

Should the entity identify this as a contract under Topic 606? Please explain why or why not?

Solutions

Expert Solution

Answer :-

Accounting Standards Codification 606 (ASC 606) establishes new rules for US companies about booking revenues, in the process creating a common standard for Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS),

As per the Financial Accounting Standards Board (FASB), The Topic 606 is effective all industries including non-profits where most contracts that include the transfer of goods and/or services to customers or nonfinancial assets must follow one set of revenue recognition principles.

5 Steps to the Revenue Recognition Principles are as follows :-

Step one: Identify the contract with a customer. ...
Step two: Identify each performance obligation in the contract. ...
Step three: Determine the transaction price. ...
Step four: Allocate the transaction price to each performance obligation. ...
Step five: Recognize revenue when or as each performance obligation is satisfied.

The U.S. GAAP directed revenue recognition guidance for industries including:

Financial services
Engineering and construction
Real estate
Software
Entertainment and media

An entity, a health club, enters into a one-year membership with a customer of low credit quality transaction was identified and treated as a Financial Services and Service Income.

A defined contract is an agreement reached between two parties or more creating obligations and rights that can be enforced when necessary.

Identify the contract with a customer. -- Customer Identified
Identify the performance obligations in the contract --- Yes
Determine the transaction price --- $ 120
Allocate the transaction price --- $ 10
Recognize revenue when or as the entity satisfies a performance obligation --- Yes

Hence, The above entity identify this as a contract under Topic 606.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

• Entity M, a parts supplier, enters into contract with an OEM (i.e., M’s customer) for...

• Entity M, a parts supplier, enters into contract with an OEM (i.e., M’s customer) for fixed consideration of $30 million to (1) construct equipment for the customer that M will use to make parts for the customer and (2) supply 30 million parts to the customer. • Legal title of the equipment transfers to the customer upon completion of the construction of the equipment (i.e., prior to M beginning production of the parts). • M is one of many...

Explain the role of the customer in a total quality setting in a health care entity?

Explain the role of the customer in a total quality setting in a health care entity? Identify all customer types. What type of training should occur to address all customer types to ensure satisfaction and loyalty?

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an...

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan. On July 1, 2017, the customer realizes that she needs...

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an...

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan. Required: 1. Calculate the transaction price for the smartphone and...

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an...

On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan. Required: 1. Calculate the transaction price for the smartphone and...

Customer Ltd enters into a 10-year contract with Supplier Ltd for the right to use two...

Customer Ltd enters into a 10-year contract with Supplier Ltd for the right to use two specified physically distinct dark fibres within a larger cable connecting Hong Kong to Tokyo. Customer Ltd makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (i.e., Customer ‘light’ the fibres and decides what data and how much data to transfer). If the fibres are damaged, Supplier Ltd is responsible for the repairs and...

Globo Gym charges a $500 initiation fee and $1100 for one year of membership, which gives...

Globo Gym charges a $500 initiation fee and $1100 for one year of membership, which gives members access to its facilities. On August 31, 2019, Michelle joins the gym for the first time, paying both the initiation fee and the one year membership fee. One year later, Michelle renews her membership for another year at $1100. What entries should Globo Gym make on 8/31/19, 9/30/19, 8/31/20 and 9/30/20?

TRUE OR FALSE One of the adjusting entries that entity B has made at year end...

TRUE OR FALSE One of the adjusting entries that entity B has made at year end involved a debit to an income amount and a credit to a liability (unearned income) account. Entity A must have used the income method or initial recording of advances collections of items of income. SPLITTING OF MIXED AMOUNTS 1. On May 1, 20x1, Entity B received one-year advanced rent of 480,000 from one of its tenants. The advanced rent covers the months of May...

Revenue Recognition, Cash and Accrual Bases Hathaway Health Club sold three-year memberships at a reduced rate...

Revenue Recognition, Cash and Accrual Bases Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $351 each. The club expects to sell 100 additional three-year memberships for $888 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3....

Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold...

Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $354 each. The club expects to sell 100 additional three-year memberships for $885 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Cash-basis income statement: Year 1 Year...

Subjects