Outdoors R Us owns several membership-based campground resorts throughout the Southwest. The company sells campground sites to new members, usually during a get-acquainted visit and tour. The campgrounds offer a wider array of on-site facilities than most. New members sign a multiyear contract, pay a down payment, and make monthly installment payments. Because no credit check is made and many memberships originate on a spur-of-the-moment basis, cancellations are not uncommon. Business has been brisk during its first three years of operations, and since going public in 2005, the market value of its stock has tripled. The first sign of trouble came in 2018 when new sales dipped sharply.
One afternoon, two weeks before the end of the fiscal year, Diane Rice, CEO, and Gene Sun, controller, were having an active discussion in Sun’s office.
Sun: I’ve thought more about our discussion yesterday. Maybe something can be done about profits.
Rice: I hope so. Our bonuses and stock value are riding on this period’s performance.
Sun: We’ve been recording deferred revenues when new members sign up. Rather than recording liabilities at the time memberships are sold, I think we can justify reporting sales revenue for all memberships sold.
Rice: What will be the effect on profits?
Sun: I haven’t run the numbers yet, but let’s just say very favorable.
1. Why do you think liabilities had been recorded previously?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?