2. 14 pts Crossfit Fitness is a health club that offers members various gym serv
ID: 2586176 • Letter: 2
Question
2. 14 pts Crossfit Fitness is a health club that offers members various gym services. Required: 1. Assume Crossfit Fitness offers a deal whereby enrolling in a new membership for $700 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 25% off yoga classes for one year. The yoga classes are offered to gym members as well as to the general public. A new membership normally sells for $720, and a one-year enrollment in yoga classes sells for an additional S500, Crossfit Fitness estimates that approximately 40% of the vouchers will be redeemed. Crossfit Fitness offers a 10% discount on all one-year enrollments in classes as part of its normal promotion strategy a. How many performance obligations are included in the new member deal? How much of the contract price would be allocated to each performance obligation? Explain your answer. Prepare the journal entry to recognize revenue for sale of a new membership. Clearly identify revenue offered or deferred revenue associated with each performance obligation. b. c. 2. Assume Crossfit Fitness offers a "Fit 50" coupon book with 50 prepaid visits over the next year. Crossfit Fitness has learned that Fit 50 purchasers make an average of 40 visits before the coupon book expires. A customer purchases a Fit 50 book by paying $500 in advance, and for any additional visits over 50 during the year after the book is purchased, the customer can pay a $15 visitation fee per visit. Crossfit Fitness typically charges $15 to nonmembers who use the facilities for a single day. a. How many separate performance obligations are included in the Fit 50 member deal? Explain your answer. b. How much of the contract price would be allocated to each separate performance obligation? Explain your answer. c. Prepare the journal entry to recognize revenue for the sale of a new Fit 50 book.Explanation / Answer
Solution 1:
a. There are two performance obligations in the new member deal. One has unlimited access to the facilities and classes for one year and another is discount for one year yoga classes. The discount is an option for the services which is considered as a performance obligation because it provides right to the customer that would not receive otherwise the discount is distinct because they are:-
1. Capable of being distinct.
2. Separately identifiable.
b. Stand-alone selling price of gym membership is 720. Stand-alone selling price of yoga discount option is $30. Because the actual value of yoga discount is 15% (25%-10%), The value should be 15% x $500= $75. There is 40% of yoga discount will be redeemed. Therefore, stand-alone selling price of yoga discount option is $30 ($75 x 40%). Total of stand-alone prices is $750 ($720+$30).
Yoga discount voucher% = $30/$750 = 4%
Gym membership%= $720/$750 = 96%
Therefore, The contract price would be allocated to each performance obligaton as:
Total contract price = $700
Yoga discount price = $700 x 4% = $28
Gym membership price = $700 x 96% = $672
c.Journal Entry:
Cash 700
Deferred revenue—gym membership 672
Deferred revenue—yoga discount 28
Solution 2.
a. There is only ONE performance obligatio in the Fit 50 member deal. It is the access of F&S for 50 prepaid visits. The reason behind is the Fit 50 coupon book is a material right to the access of the gym. The access is distinct because it has both the abilities of being distinct and separate identifiable from goods or services in the contract. The option for extra visits over 50 is not material because price is same as non members. Hence, it is not a performance obligation in this deal.
b.We do not need to allocate the contract price to option of additional visits because there is only one performance obligation. However, since the coupon book includes 50 visits, we should allocate the whole $500 contract price to each visit.
c. Cash $500
Deferred Revenue—Coupon Book $500
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