Reference no: EM133074062

ACCT 6305 Financial Accounting - The University of Texas at Dallas

EXERCISE1: Revenue Recognition Principles

The following questions are about the general principles of revenue recognition. Question A is about the timing of revenue recognition for membership fees at Costco, and question B accounts for membership discounts.

A. Costco operates discount warehouses for sales of food and household products to customers. Purchasing from Costco requires payment of an annual membership fee, which is paid 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?

B. Joe Smith is a loyal Costco customer. He buys Costco's Executive level membership on January 1, 2013 (the beginning of the fiscal year is January, 1) for $150. Executive level members qualify for a 2% discount on qualified purchases made at Costco warehouses. On March 25, Joe purchases goods with a retail price of $200 and receives a 2% discount on them. The goods cost Costco $100. He makes no other purchases during the year. Costco makes entries related to the membership card at the end of the fiscal year (December 31). Record all accounting entries related to Smith's annual purchase and membership.

EXERCISE2: Allowance For Uncollectible Accounts/ Bad Debt

On 1/1/2016, Penman Co. had the following account balances in its financial records:

Accounts receivable: $122,000
Allowance for uncollectible accounts: $7,900

During 2016, its sales on credit were $1,173,000 and (cash) collections on credit sales were $1,150,000. The following additional transactions occurred during the year:

Feb. 17: Wrote off Nissim's account, $3,600
May 28: Wrote off White's account, $2,400
Dec. 16: Wrote off Ohlson's account, $900
Dec. 30: Recorded the provision for uncollectible accounts at 0.8% of credit sales for the year. (Hint: The allowance account is increased by 0.8% of credit sales regardless of any prior write-offs)

Compute and show how accounts receivable and the allowance for uncollectible accounts are reported in its balance sheet on December 31, 2016.

Attachment:- Financial Accounting.rar