Question

Sam's Club (part of the Walmart consolidated operations) collects annual non-refundable membership fees from customers. When should Sam's Club recognize revenue for these membership fees assuming that they are all cancelled by all customers on the same day during the first fiscal year of the Company?

A) Immediately since the fees were nonrefundable
B) Evenly over the membership year
C) Evenly over the current fiscal year
D) At the end of the membership year when Sam's has discharged its obligation to the customer
E) Pro rata over the customer's actual purchasing pattern

Answer 1

Sam's Club should recognize revenue from membership fees evenly over the membership year, which corresponds with the revenue recognition principle and the accrual basis of accounting.

Step-by-step explanation:

The question pertains to when Sam's Club should recognize revenue from annual, non-refundable membership fees, especially if all memberships are cancelled during the first fiscal year. According to revenue recognition principle, companies should recognize revenue when it is earned and realizable, regardless of when cash is received. Therefore, the correct answer would be B) Evenly over the membership year. This reflects that Sam's Club earns the revenue over the period that its membership services are provided. Even if customers cancel their memberships, the company has still earned a portion of the fees for the duration of the time that the services were available to the customers. This approach spreads the recognition of income evenly across the period the service is provided, aligning with accrual accounting principles.