Question

Fit \& Slim (F\&S) is a health club that offers members various gym services. Required: 1. Assume F\&S offers a deal whereby enrolling in a new membership for $1,100 provides a yeer of unlimited access to facilitios and also entitles the member to receive a voucher redeemable for 30% off yoga classes for one year. The yoga classes are offered to gym members as well as to the general public. A new membership normally sells for $1,140, and a one-year enroliment in yoga classes sells for an additional $600. F\&S estimates that approximately 50% of the vouchers will be redeemed. F\&S offers a 10% discount on all oneyear enroliments in classes as part of its nomal promotion strategy. a. \& b. Indicate below whether each item is a separate performance obligation. For each separate performance obligation you havo indicated, allocate a portion of the contract price. c. Prepare the joumal entry to recognize revenue for the sale of a new membership.

Answer 1

The question pertains to accounting for Fit & Slim's bundled gym and yoga class service, which likely involves separate performance obligations that require allocation and recognition of revenue upon fulfillment of each service. Allocation is based on estimated standalone selling prices, considering redemption rates and normal discount strategies for the discounted vouchers.

Step-by-step explanation:

The student's question is related to accounting for multiple-element arrangements or bundled sales, where Fit & Slim (F&S) offers a gym membership that contains multiple deliverables such as access to gym facilities and discounted yoga classes. These components need to be assessed to determine if they represent separate performance obligations, which would require revenue to be allocated based on their standalone selling prices and recognized when each obligation is fulfilled.

Performance Obligations and Revenue Allocation

In the described scenario for Fit & Slim, you have two potential performance obligations:

1. The year-long membership giving unlimited access to the gym facilities, and
2. The voucher for 30% off yoga classes. Since these services can be sold separately, they likely represent separate performance obligations under common revenue recognition standards.

The allocation of the transaction price to these separate performance obligations needs to consider their standalone selling prices. Assuming that F&S does not sell the vouchers separately, it would require the use of an estimated selling price. With a 50% redemption rate for vouchers and a 10% normal discount on class enrollment, the effective discount rate for the voucher would need to be calculated. The calculation allows for the allocation of the $1,100 membership fee between the gym access and the voucher proportionately.

Journal Entry for Revenue Recognition

To enter the journal transaction for the sale of the membership, once the allocation is determined, the portion of the membership fee that corresponds to the immediate delivery of access to the gym facilities can be recognized as revenue. The revenue for the vouchers should only be recognized when they are redeemed or when the likelihood of redemption becomes certain enough.