Question

A company has advance subscription sales totaling $45,000 for the upcoming year when four quarterly journals will mailed to customers. When the company mails the first quarterly journal to customers, it should record:a. Debit Unearned Revenue $11,250, credit Sales $11,250.b. Debit Prepaid Subscriptions $11,250, credit Sales $11,250.c. Debit Prepaid Subscriptions $33,750; credit Unearned Revenue $33,750.d. Debit Cash $11,250, credit Sales $11,250.e. Debit Unearned Revenue $45,000; credit Cash $45,000.

Answer 1

Answer:

A.

Debit Unearned Revenue $11,250

Credit Sales $11,250

Explanation:

B. It is an income for the company. Prepaid subscription is an expense for the company. Therefore, it is incorrect.

C. It is contradictory as the company already recorded the first quarter transaction. Therefore, Unearned revenue should be debit. So, it is also incorrect.

D. According to the revenue recognition, revenue is recognized when they are earned. Therefore, the company acquired the cash when the company received last year. So, it is incorrect.

E. Again, cash cannot be credit. Therefore, it is incorrect.

A is the correct answer. As, when the company received the payment, unearned revenue was credit. As the income is now recorded for the first quarter, $(45,000/4) = $11,250 of unearned revenue becomes earned. So, it is debit. Since it is a sale of a company, the sale becomes credit.