Question

The 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 costs720 (720/24 =30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2015, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

1) 1,200 in 2015
2) 960 in 2015
3) 180 in 2017
4) 780 in 2016
5) None of these

Answer 1

Under the accrual method of accounting, Maroon Orange Gym, Inc should report $420 as gross income in 2015 from the sale of a one-year and a two-year membership, not any of the provided options.

Step-by-step explanation:

The Maroon Orange Gym, Inc. sells memberships and uses the accrual method of accounting. With this method, income is recognized when earned, not when received. For a one-year membership sold for $480, the income is recognized as $40 per month. Similarly, a two-year membership sold for $720 is recognized as $30 per month. When the company sold a one-year membership ($480) and a two-year membership ($720) on July 1, 2015, for the year 2015 (July to December), the income from the one-year membership is $40 x 6 = $240, and from the two-year membership, it is $30 x 6 = $180. Together, this totals to $420 for 2015. Therefore, none of the provided options are correct. In 2015, they should report $420 of the $1,200 received as gross income, with the remaining balance recognized in subsequent periods.