Question

Fit & Slim is a health club that offers members various gym services. F&S accounts reports.

 

Required:

1. Assume F&S offers a deal whereby enrolling in a new membership also entitles the member to receive a voucher redeemable for 25 percent off a year's worth of premium yoga classes. A new membership costs $800, and a year's worth of premium yoga costs an additional $600. F&S estimates that approximately 40 percent of the vouchers will be redeemed. F&S offers a 10 percent discount on all courses as part of its seasonal promotion strategy.

a. Identify the separate performance obligations in the new member deal.

b. Allocate the contract price to the separate performance obligations.

c. Prepare the journal entry to recognize revenue for the sale of a new membership. Clearly identify revenue or unearned revenue associated with each distinct performance obligation.

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 visit over 50 during the year after the book is purchased, the customer can pay a $15 visitation fee. Depending on the season, F&S typically charges between $12 and $18 to nonmembers who wish to work out on a single day.

a. Identify the separate performance obligations in the Fit 50 member deal.

b. Allocate the contract price to the separate performance obligations.

c. Prepare the journal entry to recognize revenue for the sale of a new Fit 50 book. When will F&S recognize revenue associated with people using its Fit 50 plans?

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 $36 ($600 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 $800, Fit & Slim would allocate $34.45 {$800 [36 ÷ ($36 + 800)]} of the $800 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	800
Unearned  revenue, membership fees	765.55
Unearned  revenue, yoga coupon	34.45

 

Requirement 2

a.     

The option to pay $15 for additional visits does not constitute a material right, because it is in the range ($12 to $18) 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 (1/40) $ 500 of revenue for each visit, since a coupon book yields approximately 40 visits. Alternatively, F&S could recognize revenue over the year following sale of the coupon book.

F&S could recognize (1/40) $ 500 of revenue for each visit, since a coupon book yields approximately 40 visits. Alternatively, F&S could recognize revenue over the year following sale of the coupon book.