Question

A New York City daily newspaper called "Manhattan Today" charges an annual subscription fee of $108. Customers prepay their subscriptions and receive 260 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $110 for an annual subscription that also would include a coupon to receive a 40% discount on a one-hour ride through Central Park in a horse-drawn carriage. The list price of a carriage ride is $100 per hour. The company estimates that approximately 30% of the coupons will be redeemed. Required: How much revenue should Manhattan Today recognize upon receipt of the $110 subscription price? How many performance obligations exist in this contract? Prepare the journal entry to recognize sale of 14 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.3

Answer 1

Answer:

How much revenue should Manhattan Today recognize upon receipt of the $110 subscription price?

$0.

Since no service/good is delivered to the customer at the time of subscription. The fee receipt would be considered as a liability and would only be recognized as revenue at the end when the service is performed.

How many performance obligations exist in this contract?

2, Delivering newspapers is one performance obligation.  The coupon for a 40% discount on a carriage ride qualifies as a second performance obligation.

Prepare the journal entry to recognize sale of 14 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

Value of the coupon: 40% discount x $100 carriage fee = $ 40

Estimated redemption                                                        x 30%  

Stand-alone selling price of coupon                                  $12

Stand-alone selling price of a normal subscription           $ 108

Total of stand-alone prices                                                $ 120

Manhattan Today must identify each performance obligation’s share of the sum of the stand-alone selling prices of all deliverables:

Coupon: $\frac{12}{108+12}$ = 10%

Subscription: $\frac{108}{108+12}$=90%

Manhattan Today allocates the total selling price based on stand-alone selling prices, as follows:

$110

(0.90)(110) + (0.10)(110) = 99 + 11

Subscription: $ 99

Coupon: $ 11

Upon receiving the fee for 10 subscriptions, the journal entry should be:

Cash ($110 x 14)               1,540

Deferred revenue – subscription ($99 x 14)                          1,386

Deferred revenue – coupon ($11 x 14)                                       154