Question

He Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2014, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

(A) $1,200 in 2014.
(B) $960 in 2014.
(C) $180 in 2016.
(D) $780 in 2015.
(E) None of these.

Answer 1

(D) $780 in 2015.

Step-by-step explanation:

The computation is shown below:

For 2014

The gross income = Per month cost × number of months + Per month cost × number of months

= $40 × 6 months + $30 × 6 months

= $240 + $180

= $420

For 2015

The gross income = One year cost - (Per month cost × number of months) + two year cost - (Per month cost × number of months)

= $480 - ($40 × 6 months) + $720 - ($30 × 6 months)

= $240 + $540

= $780

The 6 months is calculated from July 1 to December 31