Costco operates discount warehouses for sales of food and household products to customers. Purchasing from Costco requires payment of an annual membership fee, payable at the beginning of the year. Customers who cancel their memberships before year end may receive a payment equal to a prorated portion of the membership fee. Costco can predict based on experience the likely amounts of refunds. When should Costco recognize revenue from membership fees? Why should (shouldn't) Costco recognize all of the revenue at the time the membership is purchased?

Question

Nash Hamilton

Business

17 August, 09:44

Costco operates discount warehouses for sales of food and household products to customers. Purchasing from Costco requires payment of an annual membership fee, payable at the beginning of the year. Customers who cancel their memberships before year end may receive a payment equal to a prorated portion of the membership fee. Costco can predict based on experience the likely amounts of refunds. When should Costco recognize revenue from membership fees? Why should (shouldn't) Costco recognize all of the revenue at the time the membership is purchased?

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Answers (1)

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Moises Riggs · Answer 1

Answers are explained below.

Explanation:

Costco should recognize the revenue at the time when the services are delivered to the clients, but not in the start of the membership span.

As generally accepted accounting principle (GAAP), revenue should be recognized after the goods or services are sold or delivered, respectively. If it recognizes the revenue at the start of the membership, it might not able to determine costs related to it, however, it can recognize revenue on monthly basis.

So, Costco should recognize revenue monthly or yearly basis.