Question

The Tennis Times (TTT) is a publisher of magazines. Its accounting policy for subscriptions follows:

Revenues
Revenues from our magazine subscription services are deferred initially and later recognized as revenue as subscription services are provided.
Assume TTT

a) collected $420 million in 2018 for magazines that will be distributed later in 2018 and 2019,

b) provided $204 million of services on these subscriptions in 2018, and

c) provided $216 million of services on these subscriptions in 2019.

Required:

1) Using the information given, indicate the accounts, amounts, and accounting equation effects of transactions (a), (b), and (c).

2) Using the information given, prepare the journal entries that would be recorded for a) , b) and c).

Answer 1

Answer:

1)

a. Cash account and Deferred subscription fees   $420 million

The effect is an increase in assets and a corresponding increase in liabilities by $420 million.

b. Deferred subscription fees and Subscription revenue by $204 million

A decrease in liabilities and a corresponding increase in equity by $204 million

c. Deferred subscription fees and Subscription revenue by $216 million

A decrease in liabilities and a corresponding increase in equity by $216 million

2)

a. Debit Cash account  $420 million

   Credit Deferred subscription fees   $420 million

Being entries to recognize deferred subscription fees

b. Debit Deferred subscription fees  $204 million

   Credit revenue  $204 million

Being entries to recognize revenue earned

c. Debit Deferred subscription fees  $216 million

   Credit revenue  $216 million

Being entries to recognize revenue earned

Explanation:

The accounting equation shows the relationship between the elements of a balance sheet which are assets liabilities and equity. This may be expressed mathematically as

Assets = Liabilities + Equity

While assets include fixed assets, cash, inventories, account receivables etc, liabilities include accounts payable, loans payable, accrued expenses etc.

Equity which represents the amount owed to the owners of the business includes retained earnings (which is the accumulation of the net income/loss over the years less dividends paid) and common shares.

When a fee is received in advance for a service yet to be rendered, the revenue for such fee is said to be unearned. The entries required are

Debit Cash account and Credit Unearned fees or deferred revenue.

As the service is performed and the revenue is earned, debit Unearned fees and credit revenue.