QUESTION 2 &nbsp

QUESTION 2

A hospital consortium contracted with a private company to collect fees and maintain health facilities that adjoin their property. Users of the health facility can pay cash of R10 for a daily visit or they can purchase a pass. The pass has a magnetic strip that is swiped through the entrance device each time an individual enters the facility. This subtracts daily fee from the pass balance for each day used. The passes are issued for a fee of R365, which are good for 365 days. Refunds are not issued on the pass. Last year R18,650 was collected for daily visits, R438,000 of annual passes were issued, and R206,225 of pass usage was registered on the scanning equipment. How much should the company recognize as revenue for the year? Explain how the revenue recognition rule should be applied in this case.

Expert Solution

Answer

R18,650 collected for daily visits shall be recognized as revenue since services have already been provided. R438,000 collected from issue of annual passes is in the nature of Non-refundable upfront fees. Since this nonrefundable upfront fee relates to the service to a customer it should be deferred and recognised systematically over periods that the fees are earned i.e over 365 days.

Hence, revenue should be recognized to the extent of pass usage registered on the scanning equipment. At the end of the year the company should analyze the passes for which the validity of 365 days has expired but the services are yet not performed. This amount shall be recognized as Forfeiture revenue

Hence, revenue to be recognized = cash collected for daily visits R18,650 + pass usage registered on the scanning equipment R206,225 + Forfeiture revenue

The balance un-utilized pass amount will be treated as unearned revenue shown under current liabilities.

ekkarill92 answered 2 years ago

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