Question: Beth Rader purchased North Shore Health Club in June 2011

Beth Rader purchased North Shore Health Club in June 2011. Beth wanted to increase the size of the business by selling five-year memberships for $2,000, payable at the beginning of the membership period. The normal yearly membership fee is $500. Since few prospective members were expected to have $2,000, Beth arranged for a local bank to provide a $2,000 installment loan to prospective members. By the end of 2011, 250 customers had purchased the five-year memberships using the loan provided by the bank.
Beth prepared her income statement for 2011 and included $500,000 as revenue because the club had collected the entire amount in cash. Beth’s accountant objected to the inclusion of the entire $500,000. The accountant argued that the $500,000 should be recognized as revenue as the club provides services for these members during the membership period. Beth countered with a quotation from a part of ‘‘Generally Accepted Accounting Principles,’’ Accounting Research Bulletin 43, Chapter 1, Section A, No. 1:
‘‘Profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that collection of the sale price is not reasonably assured.’’
Beth notes that the memberships have been sold and that collection of the selling price has occurred. Therefore, she argues that all $500,000 is revenue in 2011.
Write a short statement supporting either Beth or the accountant in this dispute.

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  • CreatedSeptember 22, 2015
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