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# Unearned Subscription Revenues and Lifetime Subscriptions

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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:
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
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## Finance and accounting questions

1. Notes payable—discount basis On August 1, 2013, Colombo Co.'s treasurer signed a note promising to pay \$120,000 on December 31, 2013. The proceeds of the note were \$114,000.

Required:
a. Calculate the discount rate used by the lender.
b. Calculate the effective interest rate (APR) on the loan.
c. Use the horizontal model (or write the journal entry) to show the effects of
d. Signing the note and the receipt of the cash proceeds on August 1, 2013.
e. Recording interest expense for the month of September.
f. Repaying the note on December 31, 2013.

2. Other accrued liabilities—warranties Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2013. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.3% of sales. During 2013, sales totaled \$3,450,000. Actual costs of servicing products under warranty totaled \$9,700.

Required:
a. Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2013.
b. What type of accrual adjustment should be made at the end of 2013?
c. Describe how the amount of the accrual adjustment could be determined.

3.Bonds payable—record issuance and discount amortization Coley Co. issued \$15 million face amount of 9%, 10-year bonds on June 1, 2013. The bonds pay interest on an annual basis on May 31 each year.

Required:
a. Assume the market interest rates were slightly higher than 9% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain.
b. Assume that the proceeds were \$14,820,000. Use the horizontal model to show the effect of issuing the bonds.
c. Calculate the interest expense that Coley Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2013, assuming that the discount of \$180,000 is amortized on a straight-line basis.

4. Bonds payable—calculate market value On March 1, 2008, Matt purchased \$189,000 of Lawson Co.'s 8%, 20-year bonds at face value. Lawson Co. has paid the annual interest due on the bonds regularly. On March 1, 2013, market interest rates had risen to 12%, and Matt is considering selling the bonds.

Required: Using the present value tables in Chapter 6, calculate the market value of Matt's bonds on March 1, 2013. Note: Tables are at the end of the Document

5. Unearned revenues—subscription fees Evans Ltd. publishes a monthly newsletter for retail marketing managers and requires its subscribers to pay \$75 in advance for a one-year subscription. During the month of September 2013, Evans Ltd. sold 200 one-year subscriptions and received payments in advance from all new subscribers. Only 120 of the new subscribers paid their fees in time to receive the September newsletter; the other subscriptions began with the October newsletter.

Required:
a. Use the horizontal model (or write the journal entries) to record the effects of the following items: