On April 1, Garcia Publishing Company received $19,080 from Otisco, Inc. for 36-month subscriptions to several different magazines. The company credited Unearned Fees for the amount received and the subscriptions started immediately. Assuming adjustments are only made at year-end, what is the adjusting entry that should be recorded by Garcia Publishing Company on December 31 of the first year? Multiple Choice:
- debit Unearned Fees, $19,080; credit Fees Earned, $19,080.
- debit Unearned Fees, $4,770; credit Fees Earned, $4,770.
- debit Unearned Fees, $1,590; credit Fees Earned, $1,590.
- debit Unearned Fees, $14,310; credit Fees Earned, $14,310.
- debit Unearned Fees, $6,360; credit Fees Earned, $6,350.
The Correct Answer and Explanation is:
Correct Answer:
Debit Unearned Fees, $4,770; Credit Fees Earned, $4,770.
Explanation:
On April 1, Garcia Publishing Company received $19,080 from Otisco, Inc. for 36-month magazine subscriptions. The entire amount was initially recorded as Unearned Fees, which is a liability, because the company had not yet provided the services (magazines) at the time of receiving the payment.
The subscriptions started immediately on April 1. Therefore, revenue starts accruing from that date, and the company earns a portion of the revenue each month as the magazines are delivered.
Since adjustments are only made at year-end (December 31), we need to determine how many months of the subscription have been earned by December 31 of the first year:
- From April 1 to December 31 is 9 months.
To calculate the amount of revenue earned over those 9 months:
- Monthly Revenue Earned =
$19,080 ÷ 36 months = $530 per month - Revenue Earned from April to December =
9 months × $530/month = $4,770
Thus, on December 31, Garcia Publishing must adjust its books to recognize this earned revenue. The adjusting entry is:
- Debit Unearned Fees (to reduce the liability) = $4,770
- Credit Fees Earned (to recognize revenue) = $4,770
Why the Other Answers Are Incorrect:
- $19,080: This would mean recognizing the full amount, which is incorrect because only 9 months of the 36-month subscription have been earned.
- $1,590: This represents only 3 months of revenue, which is too little.
- $14,310: This would be 27 months of revenue, which is too much.
- $6,360: This is 12 months of revenue, but only 9 months have passed by year-end.
Therefore, the correct adjusting entry is to recognize $4,770 in earned revenue.
