Question

N april 1, santa fe, inc. paid griffith publishing company $1,548 for 36-month subscriptions to several different magazines. santa fe debited the prepayment to a prepaid subscriptions account, and the subscriptions started immediately. what adjusting entry should be made by santa fe, inc. for the adjustment on december 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustments had been made?

Answer 1

Let us first find out how much of the prepaid subscriptions has been used up during the reporting year. $1548 is for 36 months. So the monthly rate of subscription charges will be 1548/36 = 43. During the reporting year, subscription charges are paid only for 9 months( from April to December) So the amount to be debited to subscription charges = 43 * 9 = 387. Subscription charges will be debited with $ 387 and prepaid subscriptions account will be credited with the same amount. The remaining amount, 1548-387=1161, will remain in prepaid subscriptions account as a debit balance.