On April 1, Garcia Publishing Company received \$1,548 from Otisco, Incorporated for 36 -month subscriptions to severai different magaxines. The company credited Unearned Revenue for the amount recelved and the subscriptions started inmediately. Assaming adjustments are only made at year-end. What is the adjusting entry that should be recorded by Garcin Publishing Company on December 3 of the second year? Muituplo Crioke dobit Unearned Revenoe, \$1,548, aeds Sabscription Reveniex, $1,548 debit Uneerned Revenue, 5515 , credit Suascription Revenue, $516
The Correct Answer and Explanation is:
Correct Adjusting Entry (on December 31 of the second year):
Debit Unearned Revenue: $516
Credit Subscription Revenue: $516
Explanation:
On April 1, Garcia Publishing Company received $1,548 for 36-month magazine subscriptions. Because the services (magazine issues) are to be delivered over time, the company initially recorded the entire amount as Unearned Revenue, a liability, indicating that they owe future service.
Journal Entry on April 1 (initial):
- Debit Cash: $1,548
- Credit Unearned Revenue: $1,548
The subscription starts immediately, and revenue is recognized monthly as the company delivers the magazines. The full subscription period is 36 months, so:
- Monthly revenue = $1,548 ÷ 36 = $43 per month
Since adjustments are only made at year-end, we need to determine how many months of revenue should be recognized by December 31 of the second year.
Step 1: Determine how many months have passed by that date:
- Subscription start: April 1, Year 1
- Adjusting entry date: December 31, Year 2
That’s a total of:
- From April Year 1 to December Year 1 = 9 months
- Full Year 2 = 12 months
→ Total: 21 months
Step 2: Revenue recognized by end of Year 1:
- 9 months × $43 = $387 (already adjusted at end of Year 1)
Step 3: Revenue to be recognized in Year 2:
- 12 months × $43 = $516
This is the adjusting entry needed at December 31, Year 2.
Final Adjusting Entry:
- Debit Unearned Revenue: $516
- Credit Subscription Revenue: $516
This entry correctly shifts 12 months of earned revenue from a liability account to the income statement.
