annual report of Costco Wholesale Corporation for fiscal year ended September 1,
ID: 2654188 • Letter: A
Question
annual report of Costco Wholesale Corporation for fiscal year ended September 1, 2013 ncludes the following footnote (excerpted) Revenue Recognition sales, fees where applicable, net of estimated The Company generally recognizes which include shipping returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from customers prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities on the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns, net of the estimated net realizable value of merchandise inventories to be returned and any estimated disposition costs. Amounts collected from members, which under common trade practices are referred to as sales taxes, are recorded on a net basis The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. Generally, when Costco is the primary obligor subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue and related shipping fees are recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts as commissions earned, which is reflected in net sales The Company accounts for membership fee revenue, net of estimated refunds, on a deferred basis, whereby revenue is recognized ratably over the one-year membership period. The Company's Executive Members qualify for a 2% reward (up to a maximum of $750 per year on qualified purchases), which can be redeemed at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards on the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $970, $900, and $790 in 2013, 2012, and 2011, respectively d. Assume that on September 1, 2013, Costco collected $7,200 in membership fees from customers Use the financial statements effects template that follows to show how Costco would record this transaction and what accounting adjustment Costco would record on November 30, 2013 e. Costco is contemplating adding a fitness facility to its warehouses customers would pay a monthly fee to use fitness equipment and take classes. How would Costco record monthly fees from customers if Costco runs the facility itself, that is, Costco purchases all the equipment and the fitness facility is staffed entirely by Costco employees? How would Costco record revenue if the company sub-contracts the fitness facility to a third-party operator and receives a percentage of monthly customer fees from the sub-contractor Balance Shee Net Liab Contrib Earned Rev Expen Cash Noncash Transaction Capita Assets Capita Asset ties enues SeS Come Sept. 1, 2013 Nov. 30, 2013Explanation / Answer
Part d)
September 1, 2013
Since, the membership fees is collected once in a year, we will treat the entire amount of fees so received as unearned revene on 1st September 2013. This will result in an increase in the "Cash" balance on the asset side and creation of an "Unearned Revenue" liability as the revenue has still not been earned by Costco.
November 30, 2013
The revenue will be recognized on month-to-month basis. Therefore, the company will adjust 3 months unearned revenue totalling $1,800 (7,200/12*3) on 30th November 2013, by reducing its balance of unearned revenue account/liability and transferring the same to revenue account. This transaction would result in an increase in net income which would result in an increase in the amount to be transferred to retained earnings account or earned capital.
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Part e)
Here, Costco would follow the EITF (Emerging Issue Task Force) 99-19 in the treatment of revenue. As per this accounting criteria, If the company runs the facility itself and incurs all the related costs of establishing and managing the facility, it would indicate that the company has inventory risk, is responsible for all the sales transactions, has power to select suppliers and set prices for its products/service offerings. In such a case, the company can recognize the membership fees received as gross revenue at the end of each month.
However, if Costco sub-contracts the facility to a third party operator, it would indicate that the company is not responsible for sales transactions, has no influence over the prices or supplier selection and has no inventory risk. In such a case, the amount received as a fixed percentage would be treated as commission earned and reported as net revenue.
Balance Sheet Income Statement Transaction Cash Asset + Non Cash Assets = Liabilities + Contributed Capital + Earned Capital Revenues - Expenses = Net Income Sept. 1, 2013 +7200 = +7200 (Unearned Revenue) - = Nov. 30, 2013 = -1800 (Unearned Revenue) +1800 (Retained Earnings) +1800 - = +1800Related Questions
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