Question

Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $354 each. The club expects to sell 100 additional three-year memberships for $885 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3.

Cash-basis income statement:

	Year 1	Year 2	Year 3
Sales	$354,000	$88,500	$88,500
Equipment*	$118,000	$0	$0
Salaries and wages	49,900	49,900	49,900
Advertising	5,110	5,110	5,110
Rent and utilities	32,430	32,430	32,430
Net income (loss)	$148,560	$1,060	$1,060

*Equipment was purchased at the beginning of year 1 for $118,000 and is expected to last for three years and then to be worth $1,180.

Required:

Convert the income statements for each of the three years to the accrual basis. Indicate a net loss with a minus sign.

Hathaway Health Club
Income Statements
	Year 1	Year 2	Year 3
Sales	$	$	$
Expenses:
Depreciation	$	$	$
Salaries and wages
Advertising
Rent and utilities
Total expenses	$	$	$
Net income (loss)	$	$	$

Answer 1

Solution:

Annual depreciation assuming straight line method of depreciation=(Cost-Closing worth)/life

=($118,000-$1,180)/3

=$38,940

As per accrual basis,three year non-refundable membership fee should be recognised in the income statement over the three year.Thus,yearly non-refundable membership fee to be recoginised in Income statement is;

=$354,000/3=

Income statements

Year	1	2	3
Sales	$118,000	$206,500	$206,500
Less:Expenses
Depreciation	38,940	38,940	38,940
Salaries and wages	49,900	49,900	49,900
Advertising	5,110	5,110	5,110
Rent and utilities	32,430	32,430	32,430
Total expenses	126,380	126,380	126,380
Net income (loss)	-$8,380	$80,120	$80,120