Words You Are The Accountant For Jolly Fitness A Health Club

400 Words you Are The Accountant For Jolly Fitness A Health Club

You are the accountant for Jolly Fitness, a health club, and the business owner is concerned about low revenue. There are three situations related to this club: membership fees collected in advance at the beginning of the year, coupon books sold for classes, and sales of fitness machines with installment payments. The owner requests guidance on how to recognize revenue correctly under GAAP principles.

Firstly, the membership fees are collected upfront and allow members access to multiple locations and the option to cancel with a full refund for unused months. Recognizing revenue improperly by recording it immediately upon collection violates GAAP, which requires revenue to be recognized when earned. Since members can cancel and receive refunds, the revenue should be deferred and recognized proportionally over the membership period as the service is provided. This aligns with the revenue recognition principle, which states that revenue is recognized when earned and realizable.

Secondly, the sale of coupon books permits customers to attend classes without becoming memberships. Since coupons may expire if unused, revenue from these sales is not recognized immediately upon sale. Instead, revenue should be deferred and recognized as the coupons are redeemed or expire. This matches revenue recognition with the period in which the service (class attendance) occurs, adhering to the matching principle in GAAP, which ensures expenses and revenues are recorded in the same period.

Lastly, the sales of fitness machines on installment plans involve initial down payments and future payments over two years. Revenue from initial payments should be recognized immediately for the portion earned, but for the installment payments, revenue is recognized as the payments are received, provided the collectability is reasonably assured. Additionally, the company offers a 90-day full refund policy; any machines returned within this period should have their revenue reversed accordingly. Repairs performed on machines sold are considered post-sale services and may be recognized separately if provided; otherwise, their revenue is recognized when the service is performed.

In conclusion, recognizing revenue prematurely or based solely on cash receipt violates GAAP principles. Proper revenue recognition involves deferring revenue until the service is performed or the product is delivered and collecting payments in a manner consistent with when the revenue is earned. Accurate adherence to these principles ensures financial statements fairly represent the company's financial position and performance, which is essential for decision-making and obtaining loans.

Paper For Above instruction

As the accountant for Jolly Fitness, a prominent health club, understanding and applying proper revenue recognition principles under GAAP (Generally Accepted Accounting Principles) is essential. The owner’s concern about low revenue and the improper recognition of income calls for a thorough review of each revenue stream to ensure compliance with accounting standards, which promotes transparency and accuracy in financial reporting.

First, regarding the membership fees paid in advance, Jolly Fitness collects dues at the beginning of the year, granting members access across four locations with the option of cancellation and refund for unused months. Recognizing these fees as revenue immediately upon receipt contravenes GAAP, which stipulates that revenue must only be recognized when earned, i.e., as the service is provided over time. Since the club allows refunds for unused months, the revenue should be deferred at the time of collection and recognized proportionally over the membership period, corresponding with the monthly access provided to members. This approach aligns with the revenue recognition principle, which emphasizes that revenue is recognized when the entity satisfies its performance obligations.

Secondly, Jolly Fitness sells coupon books containing 25 class coupons that expire if unused by year-end. Under GAAP, revenue from the sale of these coupons should not be recognized immediately. Instead, it should be deferred and recognized only as the coupons are redeemed by customers or expire unused. This ensures revenue recognition aligns with the actual delivery of services—the classes attended or the expiration of unused coupons—thereby matching revenue with the period in which the services are rendered, in accordance with the matching principle, which enhances financial statement accuracy.

The sale of fitness machines presents another complex scenario. Customers purchase these equipment with a 30% down payment and a two-year installment plan. The initial down payment is earned when the sale is made, so it should be recognized as revenue immediately. However, installments received over time should also be recognized as revenue as cash is collected, provided that the collectability is reasonably assured, according to GAAP. The club offers a 90-day full refund window; during this period, revenues associated with returned machines should be reversed, ensuring revenue recognition reflects the economic reality. Additionally, repair services provided post-sale, which occur in a small percentage of cases, should be recognized separately when the service is performed, consistent with the revenue recognition principle for multiple-element arrangements.

In conclusion, to maintain compliance with GAAP, Jolly Fitness must defer revenue recognition for membership fees, coupons, and installment sales until the related services are performed or goods delivered. Premature revenue recognition can lead to distorted financial reports, misinforming stakeholders and potentially violating accounting standards. Accurate revenue recognition not only complies with GAAP but also provides a truthful depiction of the company’s financial health, aiding strategic decision-making and lender confidence.

References

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• Financial Accounting Standards Board (FASB). (2020). Revenue Recognition (ASC 606). FASB.