Form 10-K of Costco Wholesale Corporation for fiscal year ended August 28, 2016, includes the following footnote (excerpted):
Revenue Recognition
The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis.
The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales. The Company records related shipping fees on a gross basis.
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $1,172, $1,128, and $1,051 in 2016, 2015, and 2014, respectively.
Continued next page
Required:
a. Explain in layman's terms how Costco recognizes the cash received from customers who purchase goods or services.
b. What are "sales returns" and how does Costco record them in their financial statements?
c. Explain in layman's terms how Costco recognizes revenue from annual memberships.
d. On August 28, 2016, Costco collected $2,646 million in membership fees from customers. Use the financial statements effects template that follows to show how Costco would record this transaction and what accounting adjustment Costco would record on November 30, 2016.
e. Costco is contemplating adding a fitness facility to its warehouses-customers would pay a monthly fee to use fitness equipment and take classes. How would Costco record monthly fees from customers if Costco runs the facility itself, that is, Costco purchases all the equipment and the fitness facility is staffed entirely by Costco employees? How would Costco record revenue if the company sub-contracts the fitness facility to a third-party operator and receives a percentage of monthly customer fees from the sub-contractor?

Thomas Company Receives Information That Requires the Company to Increase

Multiple Choice

Correct Answer:VerifiedUnlock this answer nowGet Access to more Verified Answers free of chargeAccess For Free

Correct Answer:
Verified
Unlock this answer now
Get Access to more Verified Answers free of charge