II. For each of the following situations based on SAB No. 101, indicate the audi
ID: 2576906 • Letter: I
Question
II. For each of the following situations based on SAB No. 101, indicate the audit evidence that should be obtained to determine whether revenue should be recognized or not in the current period:
Dave's Discount Stores is a discount retailer who generates revenue from the sale of membership fees it charges customers to shop at its stores. The membership arrangement requires the customer to pay the entire membership fee (usually $48) at the beginning of the arrangement. However, the customer can unilaterally cancel the membership arrangement and receive a refund of the unused portion. Based on past experiences, Dave's estimates that 35 percent of the customers will cancel their memberships before the end of the contract.
Explanation / Answer
To recognize revenue, Dave should do the total of the amount of revenue with 100% certainly to get. Then set off or net it against the 35% of customers that will cancel their memberships before the end of the contract for the proportionate time. At the time when the membership is arranged for customers, recognition of revenue should be made. Amount of revenue = The total revenue - the 35% of the customer's cancellation fees.
For example,
If we suppose that 35% customer will cancel membership after 6 months so we will recognize revenue proportionately for 6 months only for the 35%.
Let's do it for 500 customers as shown below.
Amount of revenue = The total revenue - the 35% of the customer's cancellation fees.
= ($48*500*65%) - ($48*500*35%*6/12)
=$15600-$4200
=$11400.
$11,400 should be recognized as revenue.