Analyzing Unearned Revenue Disclosures
The following disclosures (excerpted) are from the August 28, 2016, annual report of Costco Wholesale Corporation.
Revenue Recognition: We generally recognize sales, net of estimated returns, at the time the member takes possession of merchandise or receives services. When we collect payment from customers prior to the transfer of ownership of merchandise or the performance of services, the amount recieved is generally recorded as deferred revenue on the consolidated balance sheets until the sales or service is completed. Membership fee revenue represents annual membership fees paid by our memberships. We account for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period.
|August 28, 2016||August 30, 2015||August 31, 2014|
|Current Liabilities ($ millions)||August 28, 2016||August 30, 2015|
|Current portion of long-term debt||1,100||1,283|
|Accrued salaries and benefits||2,629||2,468|
|Accured member rewards||869||813|
|Deferred membership fees||1,362||1,269|
|Other current liabilities||2,003||1,695|
|Total current liabilities||$15,575||$16,539|
(a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?
Because Costco does not know how many of its members will continue to the end of the year, cash received from members is recorded as a liability and recognized as revenue only at year-end.
When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.
The company records revenue when the cash is received.
Because Costco has a refund policy, the company records revenue when the cash is received, less an allowance for expected membership terminations.
Mark 1.00 out of 1.00
(b) Use the balance sheet information on Costco's Deferred Membership Fees liability account and its income statement revenues related to Membership Fees earned during 2016 to compute the cash that Costco received during 2016 for membership fees.
Total cash received (in $ millions) = $Answer
(c) Use the financial statement effects template to show the effect of the cash Costco received during 2016 for membership fees and the recognition of membership fees revenue for 2016.
Use negative signs with answers, when appropriate.
Transaction ($ millions)
|Cash Asset||+||Noncash Assets||=||Liabilities||+||Contributed Capital||+||Earned Capital|
|Receive cash in advance for membership fees||Answer||Answer||Answer||Answer||Answer|
|Recognized membership fees earned||Answer||Answer||Answer||Answer||Answer|
You have correctly selected 15.
Marks for this submission: 15.00/18.00.
(a) When it receives cash, the company records it a current liability. Then, it recognizes revenue evenly over the year.
(b) Total cash received (in $ millions): $2739
|Deferred Membership Fees|
|Membership fees revenue||2646||2739||Cash received|
The cash received is calculated as a balancing amount.
|Balance Sheet||Income Statement|
|Transactions ($ millions)||Cash Asset||+||Noncash Assets||=||Liabilities||+||Contributed Capital||+||Earned Capital||Revenue||-||Expenses||=||Net Income|
|Receive cash in advance for membership fees||2739||2739|
|Recognized membership fees earned||-2646||2646||2646||2646|
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