The following disclosures (excerpted) are from the September 2, 2018, annual report of Costco Wholesale Corporation. The Company generally recognizes sales, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership.

The Company’s Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,394, $1,281, and $1,172 in 2018, 2017, and 2016, respectively.

Revenue Sept. 2, 2018 Sept. 3, 2017 Aug. 28, 2016
($ millions)

Net Sales $138,434 $126,172 $116,073
Membership fees 3,142 2,853 2,646
Total revenue $141,576 $129,025 $118,719

Current Liabilities ($ millions) Sept. 2, 2018 Sept. 3, 2017

Accounts payable $11,237 $9,608
Accrued salaries and benefits 2,994 2,703
Accrued member rewards 1,057 961
Deferred membership fees 1,624 1,498
Other current liabilities 3,014 2,725
Total current liabilities $19,926 $17,495

Which of the following statements best explains in layman terms how Costco accounts for the cash received for its membership fees?

a. Because Costco does not know how many of its members will continue to the end of the year, cash received from members is recorded as a liability and recognized as revenue only at year-end.
b. When it receives cash, the company records it as a current liability. Then, it recognizes revenue evenly over the year.
c. The company records revenue when the cash is received.
d. Because Costco has a refund policy, the company records revenue when the cash is received, less an allowance for expected membership terminations.