What are Super Electronics’ sources of revenue?
Super Electronics Inc. is a well renowned company which has specialized in selling electronic products. The company also provides various services to its customers. In addition to this, the company has also started a customer loyalty program from where it earns membership fees.
Moreover, the company has negotiated few terms with its vendors, under which the company would receive 7% of the refund on all purchases if it commits a purchase of $100 million over a three year period.In addition to this, the company would also receive an additional 1% if the amount of purchases goes to $150 million.
Thus, the main sources of revenue of the company are
Revenue from sales of products.
Revenue from providing services.
Revenue from membership fees. (Customer Loyalty Program).
Revenue from vendor allowances.
How should Super Electronics account for its membership fees? Point-in-time or over-time?
Super Electronics has introduced a Customer Loyalty program under which the company offers various attractive packages in order to satisfy its customers as well as in order to earn their confidence and satisfaction. The company has set a membership fee of $24 per year which should be paid by the customers in order to get membership of customer loyalty program.
According to ASC 606, “The revenues should be recognized when all the risks and rewards related to the asset or service, point in time, or over time is transferred to the customers.”(FASB, 2014)
This indicates that the company should only recognize revenue when it is earned by the company. In the case of membership fees, the company should record a liability of unearned membership fees, and should convert this liability into income in accordance with the services provided over the period of time. Therefore, the revenue generated from membership fees should be recognized point over-time.
How much in membership fees should Super Electronics recognize in 2008? Show calculations
The calculations below show that the company should recognize $7,200,000 as a total membership fee in the financial year 2008 if it is assumed that there is no cancellation of membership fees. However, in the calculations below, it is assumed that 10% of the members have cancelled their subscription after 6 months of their membership, therefore in this case, the company would recognize $6,840,000.
No. of Members / month
25000
Membership fee / month
$24
Months
12
Total membership fee per year
$7200000
Cancellation of Membership fee (ASSUMED)
10% of the members
2500
No. of months left (assumed)
6
Total amount of cancellation
$360000
Net fee to be recognized.
$6840000
The company should make following journal entry at the start of the year when the cash of membership fee is received. It is assumed that none of the member has cancelled its membership...........
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