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The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships...

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, 2014, 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 2014.

b. $960 in 2014.

c. $180 in 2016.

d. $780 in 2015.

e. None of these.

Please do the math and explain how you got your numbers.

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Answer #1

d.) $780 in 2015 ,

Accrual method of accounting records the income on earned basis, not on actual received basis. first 6 months income will be recorded in 2014 and remaining in 2015 :

For the year 2014 :

From July 1, 2014 to Dec31,2014 ,gross income from the two contracts = [$40 * 6 months] + [$30 * 6 months]

= $240 + $180

= $420

For the year 2015 :

From 1 jan, 2015 to 30 June,2015, gross income from the two contracts = [$480 - (6months * 40)] + [$720 - ($30 * 6 months)]

= [$480 - $240] + [$720 - $180]

= $240 + $540

= $780

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