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 $700 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 25% 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 $720, and a one-year enrollment in yoga classes sells for an additional $500. F&S estimates that approximately 40% 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 $500 in advance, and for any additional visits over 50 during the year after the book is purchased, the customer can pay a $15 visitation fee per visit. F&S typically charges $15 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.

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.

	Item Description Performance Obligations? Stand Alone Prices Percentage of Total Stand Alone Prices Yoga discount voucher Yes 0 Gym membership Yes 0 Total stand alone price $0 0% Item Description Percentage of Total Stand Alone Price Total Transaction Price Allocated Contract Price Yoga discount voucher $0 Gym membership $0 Total contract price $0

Prepare the journal entry to recognize revenue for the sale of a new membership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

No	Transaction	General Journal	Debit	Credit
1	1	Cash	700
				672
				28

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.

	Item Description Performance Obligations? Stand Alone Prices Percentage of Total Stand Alone Prices Fit 50 Yes 0 Additional gym visits No 0 Total stand alone price $0 0% Item Description Percentage of Total Stand Alone Price Total Transaction Price Allocated Contract Price Fit 50 $0 Additional gym visits $0 Total contract price $0

Prepare the journal entry to recognize revenue for the sale of a new Fit 50 book. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

No	Transaction	General Journal	Debit	Credit
1	1	Cash	500
				500

Answer 1

Requirement 1

a.      The gym membership is one separate performance obligation. Since the discount voucher provides a material right to the customer that the customer would not receive otherwise (a 25% percent discount rather than a 10 percent discount), the discount voucher also is a separate performance obligation.

b.  To allocate the contract price to the performance obligation, we should first consider that Fit & Slim would offer a 10 percent discount on the yoga course to all customers as part of a seasonal promotion. So, a 25 percent discount provides a customer with an incremental value of 15 percent (25% – 10%). Thus, the estimated standalone selling price of the course voucher provided by Fit & Slim is $50 ($500 initial price of the course 15% incremental discount 40% likelihood of exercising the option). Since the standalone selling price of the annual membership fee is $720, Fit & Slim would allocate $46.75{$720 x [50 ÷ ($50 + 720)]} of the $720 transaction price to the discount voucher on yoga course.

c. Since the discount voucher of the yoga course would be a separate performance obligation, Fit & Slim would recognize revenue for the sale of annual membership fee and discount voucher.

Cash	$720
Unearned revenue, membership fees		$673.25
Unearned revenue, yoga coupon		$46.75

Requirement 2

a.      The option to pay $15 for additional visits does not constitute a material right, because it is $15 of normal fees paid by nonmembers. Therefore, it is not a separate performance obligation in the contract.

b.   Since the option to visit on additional days is not a separate performance obligation, F&S should not allocate any of the contract price to it. Therefore, the entire $500 payment is allocated to the 50 visits associated with the coupon book.

c. Cash                                                        500

         Unearned revenue, coupon book                500

F&S could recognize (1/50)x $500 of revenue for each visit, since a coupon book yields approximately 50 visits. Alternatively, F&S could recognize revenue over the year following sale of the coupon book.