Reference no: EM132692454

Revenue Recognition, Cash and Accrual Basis Hathaway

Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $366 each.  The club expects to sell 100 additional three-year memberships for $900 each over each  of the next two years. Membership fees are paid when clients sign up. The club's book- keeper has prepared the following income statement for the fi rst year of business and  projected income statements for Years 2 and 3.

Cash-basis income statements:
Year 1. Year 2. Year 3

Sales. 366000. 90000. 90000
Equipment. 100000. 0. 0
Salaries and wages. 50000. 50000. 50000
Advertising. 5000. 5000. 5000
Rent and utilities. 36000. 36000. 36000
Net income (loss). 175000. (1000). (1000)

Equipment was purchased at the beginning of Year 1 for $100,000 and is expected to last  for three years and then to be worth $1,000.

Required

Question 1. Convert the income statements for each of the three years to the accrual basis.

Question 2. Describe how the revenue recognition principle applies. Do you believe that the  cash-basis or the accrual-basis income statements are more useful to management?  to investors? Why?