E11-4 Guyer company publishes a monthly sports magazine, fishing preview. Subscr
ID: 2379167 • Letter: E
Question
E11-4
Guyer company publishes a monthly sports magazine, fishing preview. Subscriptions to the magazine cost $20 per year. During november 2010, Guyer sells 12,000 subscriptions beginning with the December issue. Guyer prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts unearned subscriptions and subscription revenue.
Prepare the entry in November for the receipt of the subscription.
Nov 30
Prepare the adjusting entry at december 31,2010, to record subscription revenue earned in december 2010.
Dec 31
Prepare the adjusting entry at March 31,2011, to record subscription revenue earned in the first quarter of 2011.
Mar 31
Explanation / Answer
Unearned revenue is a liability account, in this case, Guyer sold 12,000 subscriptions in November and got the cash for them but they didn't really earn this revenue until they provide the service. This means that Guyer will earn the revenue as they give out magazines month by month so...in November the entry will be:
DR. Cash (12,000 * $20) = $240,000
CR. Unearned Revenue $240,000
- in December Guyer would have mailed out one months worth of subscription magazines so we have to recognize the revenue generated by these. In this case we'd need to decrease our "unearned revenue" account and increase our "revenue" account as follows (the fraction 1/12 means 1 month out of the 12 for the year):
DR. Unearned Revenue ($240,000 * 1/12) = $20,000
CR. Revenue $20,000
- Since Guyer reports quarterly, they need to report their revenue on March 31, so in this case Guyer needs to adjust their accounts for earned revenue for the quarter (which means for revenue made for the months of January, February, March 2011) - this would mean we need to adjust out revenue for 3 months worth of subscriptions as we did above:
DR. Unearned Revenue ($240,000 * 3/12) = $60,000
CR. Revenue $60,000
- notice I used the full ammount of the subscription (240,000) even though we already decreased the unearned revenue account in December (by 20,000), this is because I want to know how much of the total subscriptions for the year have I earned - I can do this differently in that I can adjust the unearned revenue account after my initial decrease (meaning my unearned revenue account = 240,000 - 20,000 = 220,000) and adjust the entry for March 2011 as follows (220,000 * 3/11) which would result in the same answer, just be careful with your steps. Hope this helped.
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