Question

Magazine sells subscriptions for $ 60 for 12 issues. The company collects cash in advance and then mails out the magazines to subscribers each month. Apply the revenue recognition principle to determine a. when South Shore Magazine should record revenue for this situation. b. the amount of revenue South Shore Magazine should record for eight issues.

Answer 1

Answer:

a. The company should recognize one-twelfth (1/12) of each subscribers' cash advance each month for 12 months.

b. The amount of revenue the company should record for eight issues is $40 [$60 × 8/12].

Explanation:

The revenue recognition principle dictates that revenue is recognized in the period in which it is earned. When the company collects cash in advance for each subscription, it should record the $60 to a liability account like Cash Advances, Customer Advances, Unearned Revenue, or Deferred Revenue. Every month for 12 months, the company should recognize one-twelfth (1/12) of each subscribers' cash advance (or $5) as Subscriptions Revenue, Sales Revenue, or Earned Revenue. Therefore, if issues have been delivered for eight months now, the company should have recorded $40 of each $60 subscription.