Question

The Tennis Times (TTT) is a publisher of magazines. Its accounting policy for subscriptions follows:RevenuesRevenues from our magazine subscription services are deferred initially and later recognized as revenue as subscription services are provided.Assume TTTa) collected $420 million in 2018 for magazines that will be distributed later in 2018 and 2019,b) provided $204 million of services on these subscriptions in 2018, andc) provided $216 million of services on these subscriptions in 2019.Required:1) Using the information given, indicate the accounts, amounts, and accounting equation effects of transactions (a), (b), and (c).2) Using the information given, prepare the journal entries that would be recorded for a) , b) and c).

Answer 1

Answer:

The Tennis Times:

1) Accounts, amounts, and accounting equation effects of transactions:

a) Cash Account and Deferred Subscription Revenue Account will be debited and credited with the sum of $420 million respectively.

The accounting equation is Assets (Cash) will be increased and Liabilities (Deferred Subscription Revenue) increased by $420 million respectively.

b) Deferred Subscription Revenue Account and Subscription Revenue Account will be debited and credited with the sum of $204 million in 2018 respectively.

The accounting equation is Retained Earnings will increase and Liabilities (Deferred Subscription Revenue) will decrease by $204 million respectively.

c) Deferred Subscription Revenue Account and Subscription Revenue Account will be debited and credited with the sum of $216 million in 2019 respectively.

The accounting equation is Retained Earnings will increase and Liabilities (Deferred Subscription Revenue) will decrease by $216 million respectively.

2) Journal Entries:

2018:

a) Debit Cash with $420 million

Credit Deferred Subscription Revenue with $420 million

To record the collection of subscription for 2018 and 2019.

b) Debit Deferred Subscription Revenue Account with $204 million

Credit Subscription Revenue Account with $204 million

To recognize subscription for 2018

c) Debit Deferred Subscription Revenue Account with $216 million

Credit Subscription Revenue Account with $216 million

To recognize subscription for 2019

Explanation:

a) When revenue is collected, it should be recognized in the financial statement (Income Statement) based on the matching principle and accrual concepts.

The matching principle states that revenue for a period should match the expenses or costs incurred for earning the revenue.  And the accrual concepts states that revenue and costs should be recognized whether cash was received or not.

The implication is that when though revenue was collected for 2018 and 2019, only the revenue for 2018 should be recognized in the financial statement of 2018.  The other part for 2019 should be deferred till 2019 when it would be recognized.