Question

Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to...

Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $300 ($300/12 = $25 per month); a two-year membership costs $576 ($576/24 = $24 per month). Cash payment is required at the beginning of the membership. On July 1, Year 1, Kathy sold a one-year membership and a two-year membership. Assume both customers started using the memberships on July 1, Year

a. Determine the amount of income Kathy recognizes in Year 2 from the one-year contract

b. Determine the amount of income Kathy recognizes in Year 2 from the two-year contract

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Answer #1
Answer a.
Amount of income Kathy recognizes in Year 2 from the one-year contract = $25 X 6 Months
(From Jan 1 to June 30)
Amount of income Kathy recognizes in Year 2 from the one-year contract = $150
Answer b.
Amount of income Kathy recognizes in Year 2 from the two-year contract = $24 x 12 Months
(From Jan 1 to Dec 31)
Amount of income Kathy recognizes in Year 2 from the two-year contract = $288
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