Bally Total Fitness is one of the leading owners and operators of health clubs in the world

Bally Total Fitness
Bally Total Fitness is one of the leading owners and operators of health clubs in the world. When a customer signs up for a health club membership, she/he agrees to an upfront initiation fee (to start the membership) as well as additional monthly payments for the right to use the health club. Using their balance sheet (and an extract from one of their footnotes) on the following two pages, please answer these questions.

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1. As of the end of Year 2, what is the total value of club memberships that Bally’s customers had paid but that Bally has not yet recognized as revenue?

2. (a) What is the ratio of current assets divided by current liabilities (known as the current ratio) for Bally as of December 31st of Year 2?

(b) What would the (current) ratio be if Bally recognized all of this revenue immediately instead of deferring it?
Bally Total Fitness
CONSOLIDATED BALANCE SHEETS (All dollar amounts in thousands)

DECEMBER 31,
———————-
YEAR 2 YEAR 1
———- ———-
ASSETS
Current assets:
Cash and equivalents $ 64,382 $ 61,679
Short-term investments 199,979 168,011
Other current assets 34,212 31,743
———- ———-
Total current assets 298,573 261,433

Long-term Assets:
Property and equipment, net of accum. depr. 361,300 311,197
Intangible assets 101,815 101,220
Deferred membership origination costs 97,901 86,737
Other assets 269,256 206,979
———- ———-
Total long-term assets 830,272 706,133
———- ———-
$1,128,845 $ 967,566
========== ==========
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 40,957 $ 36,908
Income taxes payable 2,608 2,342
Accrued liabilities 67,515 56,124
Current maturities of long-term debt 5,799 27,145
Deferred revenues 282,806 270,853
———- ———-
Total current liabilities 399,685 393,372

Long-term Liabilities
Long-term debt, less current maturities 482,199 405,425
Other liabilities 6,226 7,459
Deferred revenues 78,952 90,989
———- ———-
Total Long-term Liabilities 567,377 503,873

Stockholder’s Equity 161,783 70,321
———- ———-
$1,128,845 $ 967,566
========== ==========
—————————
Excerpt from NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MEMBERSHIP REVENUE RECOGNITION

The Company’s fitness centers primarily offer a dues membership, which permits members, upon paying an initial membership fee, to maintain their membership on a month-to-month basis as long as monthly dues payments are made. Revenues from initial membership fees are deferred and recognized ratably over the weighted average expected life of the memberships. Costs directly related to the origination of memberships are also deferred and are amortized using the same methodology as for initial membership fees described above.