Question

When a magazine company collects cash for selling a subscription, it is an example of: Multiple Choice An accrued liability transaction. An accrued receivable transaction.

Answer 1

The complete question is:

When a magazine company collects cash for selling a subscription, it is an example of:

1. A deferred revenue transaction

2. An accrued receivable transaction

3. A prepaid expense transaction

4. An accrued liability transaction

Answer:

A deferred revenue transaction.

Explanation:

In this scenario the magazine company has collected cash for a subscription. Subscriptions are payments that are made to gain access to a certain service. Take for example if a subscription has to be paid to a company to access their website for information. The cash has been collected but service is to be provided in the future. When service is not yet provided and payment is collected it is referred to as deferred revenue.

This is because the service has not yet been performed so revenue is not yet earned. When service is provided then the revenue is recognised.

Answer 2

Answer:

An accrued liability transaction.

Explanation:

The subscription is collected in advance and thus forms a liability to the company. Revenue is not recognized at the point of cash collection until the magazines have been supplied. Hence the cash collected is deferred in terms of revenue recognition.

This forms an accrued liability known as deferred or unearned subscription revenue.

Debit Cash, credit deferred revenue are the entries required.