Analyzing Unearned Revenue Disclosures The following disclosures (excerpted) are

Question

Analyzing Unearned Revenue Disclosures The following disclosures (excerpted) are from the September 1, 2013, annual report of Costen Wholesale Corporation. Revenue Recognition We generally recognize sales, net of estimated returns, at the time the member takes possession of merchandise or receives services. When we collect payment from customers prior to the transfer of ownership of merchandise or the performance of services, the amound received is generally recorded as deferred revenue on the consolidated balance sheets untill the sale or service is completed. Membership fee revenue represents annual membership fees paid by our members. We account for membership fee revenue, net of estmated returns, on a deferred basis, whereby revenue is recognized rataby over the one-year membership period. The components of the deferred tax assets (liabilities) are as follows (in $ millions): Required Explain in layman's terms how Costco accounts for the cash received for membership fees. Use the balance sheet information on Costco's deferred membership fees liability account and its income statement revenues related to membership fees earned during 2013 ti compute the cash that Costco received during 2013 for membership fees. Use the financial statement effects template to show the effect of the cash Costco received during 2013 for membership fees and the recognition of membership fees revenue for 2013. Costco reports a deferred tax asset related to deferred incom/membership fees. Explain in layman's terms how this asset arises. When will Costco received the benefit associated with this asset?

Explanation / Answer

Ans a According to layman term when the Costco company receives cash it is recorded as current liability - Deferred Membership fees. Than the revenue from membership is recognized evenly throughout during the whole year. Ans b Unearned Revenue Particular Amt Paticular Amt Beginning Balance 1101 Membership Revenue Recognized 2286 Cash Received Ending balance 1167 Cash received= 1101+C-2286=1167 Cash Received 2352 Ans Ans c Dr Cr Accounts Title Cash 2352 Deferred Memership fees (Unearned Revenue) 2352 Deferred Memership fees (Unearned Revenue) 2286 Membership fees (Revenue) 2286 Ans d Deferred tax is created when taxes are paid but the revenue is not recognized in the current period. Like unearned revenue taxes are paid in the current financial year as it is considered taxable income but the revenue will be recognized next year in the Income statement. So in next year the tax which is deferred can be reversed for the portion of revenue earned from the unearned revenue. So Costco will receive the benefit in future years when the deferred membership fees is earned

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