question archive Costco Wholesale Corporation (“Costco”) operates discount retail stores

Costco Wholesale Corporation (“Costco”) operates discount retail stores

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Costco Wholesale Corporation (“Costco”) operates discount retail stores. To shop in a Costco store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card. A customer purchases an annual membership from Costco for $50, a 20-pack of paper towels for $12.85, and four new tires for $440. The tire purchase includes mounting and aligning by a Costco tire technician at the time of initial installation and alignment and tire rotation services for three years afterward. The customer pays with an American Express card.2

When should Costco recognize the $50 membership fee as revenue? Costco can reliably measure the revenue from sales of membership fees. However, Costco has an obligation to stand ready to provide shopping services at Costco stores. As a result, Costco should recognize 1/12th of the membership fee, or $4.17, each month during the annual membership period. When should Costco recognize revenue from selling the paper towels? Because Costco has no further obligations related to the customer’s purchase of the paper towels, it will recognize $12.85 in revenue at the time of sale.

When should Costco recognize revenue from selling the tires plus mounting, alignment, and rotation services? At the time of initial installation, Costco performs its obligation to provide both tires and initial mounting and alignment services. Costco should recognize revenue for the portion of the $440 selling price applicable to the sale of tires and installation services at the time of installation. Costco should delay recognition of revenue for the portion of the $440 selling price applicable to the subsequent alignment and rotation services until it performs the required services.

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