Analyzing Unearned Revenue Disclosures The following disclosures are from the Se
ID: 2466051 • Letter: A
Question
Analyzing Unearned Revenue Disclosures The following disclosures are from the September 2, 2007, annual report of Costco Wholesale Corporation. Revenue Recognition: Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. The Company accounts for membership fee revenue on a deferred basis, whereby revenue is recognized ratably over the one-year term of the membership period.
The components of the deferred tax assets and liabilities are as follows (in $ millions):
(a) Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?
Because Costco does not know how many of its members will continue to the end of the year, cash received from members is recorded as a liability and recognized as revenue only at year-end.
When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.
The company records revenue when the cash is received.
Because Costco has a refund policy, the company records revenue when the cash is received, less an allowance for expected membership terminations.
(b) Use the balance sheet information on Costco's Deferred Membership Fees liability account and its income statement revenues related to Membership Fees earned during 2007 to compute the cash that Costco received during 2007 for membership fees.
Total cash received (in $ millions) = $Answer
(c) Use the financial statement effects template to show the effect of the cash Costco received during 2007 for membership fees and the recognition of membership fees revenue for 2007.
Balance Sheet
Income Statement
(d) Costco reports a deferred tax asset related to deferred income/membership fees. Explain in layman terms how this asset arises. When will Costco receive the benefit associated with this asset?
For financial reporting purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash after it reports the tax expense. This means that Costco must report GAAP revenue more quickly (in earlier periods) than for tax purposes. From this we can infer that the tax authorities use a cash basis for taxing membership fees.
For tax purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash before it reports the tax expense. This means that Costco must report GAAP revenue more slowly (in later periods) than for tax purposes. From this we can infer that Costco recognizes revenue from membership fees on a cash basis for book purposes.
For tax purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash after it reports the tax expense. This means that Costco must report GAAP revenue more quickly (in later periods) than for tax purposes. From this we can infer that Costco recognizes revenue from membership fees on a cash basis for book purposes.
For financial reporting purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash before it reports the tax expense. This means that Costco must report GAAP revenue more slowly (in later periods) than for tax purposes. From this we can infer that the tax authorities use a cash basis for taxing membership fees.
Revenue($ millions) 52 weeks ended
September 2, 2007 52 weeks ended
September 3, 2006 52 weeks ended
August 28, 2005 Net Sales $63,088 $58,963 $51,879 Membership fees 1,312 1,188 1,073 Total revenue $ 64,400 $ 60,151 $ 52,952
Explanation / Answer
Answer:(a) When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.
Answer:(b) Total cash received (in $ millions) = $1312+692-584=1420
Answer:(d) For financial reporting purposes, Costco recognizes revenue from membership fees on an accrual basis. The deferred tax asset implies that the company pays tax in cash before it reports the tax expense. This means that Costco must report GAAP revenue more slowly (in later periods) than for tax purposes. From this we can infer that the tax authorities use a cash basis for taxing membership fees.
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