Alex Rodriguez Inc., a publishing company, is preparing its December 31, 2008, financial statements and must determine the proper accounting treatment for the following situation; they have retained your group to assist them in this task.
(a) Rodriguez sells subscriptions to several magazines for a 1-year, 2-year, or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of $2,300,000 as of December 31, 2008. Outstanding subscriptions at December 31, 2008, expire as follows:
During 2009 - $600,000
During 2010 - $500,000
During 2011 - $800,000
**CHECK FIGURE MAGAZINE SUBSCRIPTION REVENUE $400,000**
(b) On January 2, 2008, Rodriguez discontinued collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $50,000 during 2007 were charged to delivery expense. The 2006 premium for the discontinued coverage amounted to $80,000 and the controller wants to set up a reserve for self-insurance by a debit to delivery expense of $30,000 and a credit to the reserve for self-insurance for $30,000.
(c) A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Rodriguez on July 1, 2008. The company's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court's award to the plaintiff is in the range between $300,000 and $700,000. No amount within this range is a better estimate of potential damages than any other amount.
(d) During December, 2008, a competitor company filed suit against Rodriguez for industrial espionage claiming $1,500,000 in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff. However, the amount of potential damages awarded to the plaintiff cannot be reasonably estimated.
For each of the above situations, provide the journal entry that should be recorded as of December 31, 2008, or explain why an entry should not be recorded.
(a) When subscriptions are taken in advance, these result in unearned revenue which is a liability. When magazines are delivered the liability is reduced and revenue is increased. In this case the total unearned revenue is 2,300,000. Of this the outstanding amount is 600,000+500,000+800,000=1,900,000. This would imply ...
The solution explains the journal entries for the given situations