Costco Companies, Inc. (Costco) operates membership warehouses that offer very low prices on a limited selection of nationally-branded and selected private label products in a wide range of facilities. Costco is the largest and most profitable chain of its kind. Its 4,0000 carefully chosen products range from toilet paper (the number one selling item) to $20,000 diamond engagement rings.
Costco requires a membership fee from its customers. This fee ($35 to $100), depending upon the services the customer desires) is paid annually and is not refundable. Members can use their membership at any warehouse location. The membership renewal rate of 86% is the highest in the industry.
Membership fee revenue could be recognized in at least three different ways:
1. When collected,
2. Evenly over the annual membership term, or
3. At the end of the membership year.
Required:
1. Describe the two conditions that must be met if revenue is to be recorded.
2. Identify the advantages and disadvantages of recognizing membership fee revenue under the three alternatives suggested above. Discuss how each of these alternatives meets "recognition and measurement criteria" under generally accepted accounting principles.
3. If you were on the management team of Costco, which method would you prefer? Explain.