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Question: CA18-8 ETHICS (Revenue Recognition—Membership Fees) Midwest Health Club (MHC) offers 1-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, MHC advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result of this policy, Richard Nies, corporate controller, recognized revenue ratably over the life of the membership. MHC is in the process of preparing its year-end financial statements. Rachel Avery, MHC’s treasurer, is concerned about the company’s lacklustre performance this year. She reviews the financial statements Nies prepared and tells Nies to recognize membership revenue when the fees are received.

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

Step by step solution

01

Definition of Corporate Profit

The money that remains in the hand of the corporation after paying all of its expenses is known as corporate profit.

02

 Step 2: Ethical issued involved

In the above case, the business entity must recognize revenue over the period rather than the point of time because the membership fee might be refunded if the customer is not satisfied. But to report higher gross, the business entity is recognizing revenue at a point in time that will misrepresent the financial statement and consequently mislead the users of the financial statement. This would create an ethical issue.

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