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 1,2015,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:
A)$1,200 in 2015.
B)$960 in 2015.
C)$180 in 2017.
D)$780 in 2016.
E)None of these.

Question

Quizplus · Accepted Answer

The company should report the gross income from the two contracts over the membership periods.

The one-year membership at $480 is for the period from July 1, 2015, to June 30, 2016, which is one year. Therefore, the gross income from this contract should be recognized over the one-year period.

The two-year membership at $720 is for the period from July 1, 2015, to June 30, 2017, which is two years. Therefore, the gross income from this contract should be recognized over the two-year period.

So the gross income for 2015 would be $480 + ($720/24*6) = $780.

Therefore, the correct answer is D, $780 in 2016, as that is the year the recognition of the income from the two-year membership is completed.