In: Accounting
Problem 5-1 Upfront fees; performance obligations [LO5-4, 5-5]
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 $1,400 provides a year of unlimited access
to facilities and also entitles the member to receive a voucher
redeemable for 30% 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 $1,455, and a one-year enrollment in
yoga classes sells for an additional $450. F&S estimates that
approximately 50% 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.
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 80” coupon book
with 80 prepaid visits over the next year. F&S has learned that
Fit 80 purchasers make an average of 70 visits before the coupon
book expires. A customer purchases a Fit 80 book by paying $450 in
advance, and for any additional visits over 80 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 80 book.
Question 1, Part a & b
Yes, both the obligations i.e. providing gym membership and voucher for yoga classes is a separate performance obligation.
Allocation of contract price:
First we find onvremental value of the offer. That is Rate of Yoga Classes less Discount i.e. 30-10=20%.
Therefore, selling price of yoga couoan would be 450 x 20% = $ 90. Likelihood of them is 50% therefore final Selling Price would be $ 45.
The standalone price of annual membership is $ 1455. Therefore gym will provide allocation of 1400x45/1500 = $ 42 to discount voucher. Thus allocation to membership fees would be $ 1358.
Part C
Debit cash by $ 1400
Credit Unearned Revenue, membership fees by $ 1358
Credit Unearned Revenue, Yoga Coupan by by $ 42
Part 2
Only discount voucher is performance obligartion as it can identified sepratoly. Thus entire $ 450 can be allocated to discount vouchers performance obligation.
Journal
Debit cash by $ 450
Credit Deffered Revenue - New Booking by $ 450