The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month)? a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2018, the company sold a one-year membership and a two-year membership. For financial reporting purposes, Maroon reports the membership income ratably over the number of months involved. The company should report as gross income from the two contracts:
A) $1,200 in 2018.
B) $960 in 2018.
C) $180 in 2020.
D) $780 in 2019.
E) None of these.

Question

Quizplus · Accepted Answer

For the one-year membership, the company should recognize $40 per month for 12 months, totaling $480. Since the membership was sold on July 1, 2018, the company should recognize 6 months of revenue in 2018, totaling $240.

For the two-year membership, the company should recognize $30 per month for 24 months, totaling $720. Since the membership was sold on July 1, 2018, the company should recognize 18 months of revenue in 2018, totaling $540.

Therefore, the total gross income from the two contracts that should be recognized in 2018 is $240 + $540 = $780. Thus, the correct answer is option D.