 INTRODUCTION

Sensations Athletic Club, owned and operated by former Olympic gold

medalist Hulk Savage is a newly opened gym in Saskatoon. SAC’s motive is
to provide the residents of Saskatoon an opportunity to live a healthier,
happier and longer life by providing affordable access to athletic
equipment, aerobics and specialized dieticians. In order to finance his
start-up Hulk borrowed $10 million from bank and invested $2 million
from his own savings. The bank does not want the debt to equity ratio to
exceed 5:1. SAC prepare their financial statements in accordance with
ASPE. SAC introduced innovative marketing strategies like savage point,
initial fee guarantee, lucky draw to encourage customers to buy
memberships. A total of full 5000 memberships have been sold so far for
$500 initiation fee with regular monthly payments of $50 each.

Users
1. Hulk Savage, Owner - The main user of Sensation Athletic Club’s financial
statements here will be Hulk Savage, the founder and CEO. To check whether
the business is profitable and his investments is safe.
Objective – Wealth maximization and recognition of revenue.
Constraints- ASPE
2. Bank- Hulk Savage borrowed $10 million from the bank, which is more than
80% of the total capital. Banks require the financial statements to estimate
the ability of the borrower to pay back the loan on time with proper interest.
Objectives- Repayment of loan
Constraints - ASPE
3. Management & Employees - Management require the financial statements
to check the profitability and liquidity of the business to formulate new sales
promotion techniques.

Journal entry for bank loan

Dr. Bank a/c 10000000
Cr. Loan a/c 10000000

Journal entry for issue of capital

Dr. Bank a/c 2000000
Cr. Capital a/c 2000000

 ISSUE: SAVAGE POINTS

Savage points can be shown as a liability as they represent an obligation
to provide a future product or service as a result of a transaction in the
past. The timing of recording this liability will have a direct impact on the
debt equity ratio, which cannot exceed 5:1.
During the first year, 5000 people purchased full memberships. Savage
points is a new marketing strategy formulated by Hulk, wherein every
member gets 1 point for each visit to the gym. These points can be
redeemed for a free protein drink or for free passes for a guest. 10 savage
points can be redeemed for a guest; the guest can use all the facilities for
free except aerobic classes. 15 savage points can be redeemed for a free
protein shake, which can be purchased for $6.5. Cost of protein shake to
the firm is $2.5. Selling price of one-day guest pass is $5.
A total of 30255 savage points were issued. According to the industry
standards 20% of the points will not be redeemed. Points were redeemed
for 60 free guests passes and 75 protein shakes.
Irredeemable points – 20% of 30255 = 6051
Points redeemed for guest passes - 60X10 = 600
Points redeemed for protein shakes- 75X15 = 1125
A total of 6051 points cannot be redeemed and 1725 (600+ 1125) points
have been redeemed by members throughout the year, which leaves
22479 points redeemable in future. 22479 points represent 2248 free
guest passes or 1498 free protein shakes.
(A) If all the unused points are to be redeemed in the same proportion as
redeemed earlier, then there would be 1000 free guest passes and 833
shakes.
 Value of unredeemable points at cost would be: (1000*0) +
(833*2.5) = $2082.5.
 Value of redeemable points at selling price: (1000*5)+
(833*6.5) = 5000+ 5414.5 = $10414.5.
(B) If all the unused points are used for guest passes only

 Value of unredeemable points at cost would be 0 because cost

of guest pass is not given
 Value of redeemable points at selling price: (2248*5) =
$11240.
(C) If all the unused passes are used for protein shakes only
 Value of unredeemable points at cost would be: 1498*2.5
= 3745
 Value of redeemable points at selling price: (1498*6.5) =
$9737.
To conclude, the company should record the liability at cost rather
than the selling price, in order to maintain a favourable debt equity
ratio as required by banks. The firm should record a liability of
$2082.5 as it is based on cost and is calculated in proportion to
previously redeemed points.
Journal Entry
Dr. Membership expense 2082.5
Cr. Accrued liability 2082.5