Mega Fitness, Inc., operates fitness centers throughout the Western states.

Members pay a
nonrefundable, initial fee of $100, as well as a monthly fee of $40. As an option, a
member could reduce the monthly fee to $30 by increasing the initial fee to $300. The
monthly fee is billed to the member near the end of each month and is due by the 15th of
the following month. The only cost incurred by Mega when a new member joins a center
is the cost of issuing a laminated identification card with the member's picture. The card
costs $3 to produce.

Required:
When should Mega Fitness recognize revenue for the initial fee and for the monthly fee?

SOLUTION

Mega should recognize revenue for the initial fee equally over the estimated average
period members will continue to be members. Even though the fee is nonrefundable, it is
not “earned” until services are provided. Since there is no contractual period of service, it
must be estimated. Mega would be justified in recognizing only $3 of the initial fee
immediately to offset the cost of the membership card. The payment option chosen by
members does not affect the revenue recognition policy.

The monthly fee should be recognized as revenue upon billing, as long as adequate
provision is made for possible uncollectible amounts.