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In: Accounting

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?

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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
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