If $46,830 is collected in advance on November 1 for 7-month magazine subscriptions, what amount of subscription revenue should be recognized on December 31?
The correct answer and explanation is :
To determine the amount of subscription revenue to recognize on December 31, we need to apply the revenue recognition principle. This principle states that revenue should be recognized when it is earned, not when the cash is received.
Step-by-Step Calculation:
- Total cash collected in advance (unearned revenue): \$46,830
- Subscription duration: 7 months
- Start date: November 1
- End date: May 31
- Monthly revenue: $$
\frac{46,830}{7} = 6,690 \text{ per month}
$$
We need to determine how many months of service have been earned by December 31.
- November and December represent 2 months of service.
- Therefore, revenue earned (and recognized) as of December 31 is: $$
6,690 \times 2 = \boxed{13,380}
$$
Explanation (300+ words):
This problem deals with the concept of accrual accounting, specifically the treatment of unearned revenue. When a company receives payment in advance for goods or services (like magazine subscriptions), the money is initially recorded as a liability called unearned revenue because the service has not yet been provided.
In this case, \$46,830 was collected on November 1 for 7-month subscriptions. This means that the service period is from November 1 to May 31, spanning 7 months.
Under the revenue recognition principle, revenue is earned and reported on the income statement only as the service is rendered. Since we’re asked to find how much revenue should be recognized as of December 31, we only account for the service provided during November and December.
To calculate this, we divide the total unearned revenue by the number of months in the subscription term:
$$
\frac{46,830}{7} = 6,690
$$
So, each month, the company earns \$6,690 from the subscriptions.
By the end of December, two full months have passed. Therefore, the revenue that should be recognized is:
$$
6,690 \times 2 = 13,380
$$
This amount (\$13,380) is moved from unearned revenue (a liability) to subscription revenue (on the income statement), reflecting that the company has now earned this portion of the advance payment.