Share
Explore BrainMass

Unearned Subscription Revenues and Lifetime Subscriptions

Accounting: What the Numbers Mean, 8th edition; Marshall, McManus and Viele, Irwin McGraw-Hill

Problem 7.24 parts A through D. Unearned revenues---subscription fees

Evans Ltd. publishes a monthly newsletter for retail marketing managers and requires its subscribers to pay $50 in advance for a one year subscription. During the month of September 2009, Evans Ltd. Sold 200 one year subscriptions and received payments in advance from all new subscribers. The only 120 of the new subscribers paid their fees in time to receive the September newsletter; the other subscriptions began with the October newsletter.

A Use the horizontal model to record the effects of the following items:
1 Subscription fees received in advance during September 2009
2 Subscription revenue earned during September 2009.

B Calculate the amount of subscription revenue earned by Evans ltd. During the year ended December 31 2009, for these 200 subscriptions.

Optional continuation of Problem 7.24-lifetime subscription offer (Note: This is an analytical assignment involving the use of present value tables and accounting estimates. Only the first sentence in Problem 7.24 applies to this continuation of the problem) Evans Ltd. Is now considering the possibility of offering a lifetime membership option to its subscribers. Under this proposal, subscribers could receive the monthly newsletter throughout their lives by paying a flat fee of $600. The one year subscription rate of $50 would continue to apply to new and existing subscribers who choose to subscribe on an annual basis. Assume that the average age of Evans Ltd's current subscribers is 38 and their average life expectancy is 78 years. Evans Ltd.'s current subscriber is 38, and their average life expectancy is 78 years. Evans Ltd.'s average interest rate on long term debt is 12%

C Using the information given, determined whether it would be profitable for Evans Ltd. to sell lifetime subscriptions

D What additional factors should Evans Ltd. consider in determining whether to offer a lifetime membership option? Explain your answer as specifically as possible.

Solution Preview

A. Because the annual subscription rate is $50, the monthly subscription rate is $50/12, or $4.17.

1. During the month of September 2009, Evans Ltd. Sold 200 one year subscriptions and received payments in advance from all new subscribers.

The journal entry is:

Cash $10,000
Unearned Subscription Revenue $10,000

So, the horizontal model is:

Balance Sheet Income Statement
Assets= Liabilities + Stockholder's Equity Revenues -Expenses=Net Income Statement of Cash Flows
Unearned Subscription
Cash = Revenue Revenue

10,000= 10,000 10,000

2. Only 120 of the new subscribers paid their fees in time to receive the September newsletter; the other subscriptions began with the October newsletter.

The journal entry is:

Unearned Subscription Revenue $500
Subscription Revenue $500

So, the horizontal model is:

Balance Sheet Income ...

Solution Summary

Using the horizontal model, this solution illustrates the effect of receiving unearned subscription fees and earning them, illustrates the computation of revenues earned at year-end, and compares the value, as well as the relative advantages, of lifetime subscriptions to annual subscription renewals.

$2.19