Question

3. Dietright Ltd is a business which provides 2 year programs to individuals who are trying to lose weight. It charges a compulsory upfront fee of $100 which is payable before commencing the weight loss program. This fee is non-refundable. This fee includes a recipe book and meals planner which has a market value of $76. In addition there is an upfront fee of $240. The fee is payable in advance at the start of the contract or can be paid each month. This fee is charged for private consultations with instructors, group support meetings and menu plans.

Required: In the light of the new accounting standard on income, how should Dietright recognise the two types of fees as income? Justify your answer

Answer 1

As per the new accounting standard on income, an income has to be recognised in books based on the fulfillment of contractual obligations and not when the actual payment/cash is received.

with that said,

additional upfront fee of $ 240 has to be recognized in books only after the service is provided by Dietright, because obligations like consultation with instructors, group support meeting and menu plans are assigned to this fee.

whereas

Compulsory upfront fee of $ 100 has to be recognized in books on the same period it is received as there is no contractual obligations assigned to that fee.