Reference no: EM132717231

Question - 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 -

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

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?