Question

If a magazine publisher receives $12 million for annual subscriptions to a monthly magazine on November 1, what would be the appropriate adjustment on 12/31 assuming no other transactions had taken place?

a. Credit Unearned Subscriptions and Debit Subscription Income for two million.

b. Debit Unearned Subscriptions and Cr. Subscription Income for two million.

c. Debit Prepaid Subscriptions and Cr. Unearned Subscriptions for two million.

d. Debit Prepaid Subscriptions and Cr. Unearned Subscriptions for one million.

Answer 1

Business will collect monies in advance of providing goods or services. In this Case a magazine publisher sells annual subscription on Nov 1. Such payments received in advance are initially recorded as a debit to Cash and a credit to Unearned Revenue. Unearned revenue is reported as a liability, reflecting the company’s obligation to deliver product in the future. Remember, revenue cannot be recognized in the income statement until the earnings process is complete.

As, the magazines are delivered for the month of November & December, the Unearned Revenue is reduced (debited) and Revenue is increased (credited) with subscription amount of two months. The balance sheet at the end of an accounting period would include the remaining unearned revenue for those goods and services not yet delivered. This amount reflects the entity’s obligation for future performance.

Following adjustment entry to be passed on12/31

		($ in millions)
Journal entries
Date	Account	Debit	Credit
11/1	Cash	12
Unearned Subscription		12
(to record th receipt of annual subscription)
12/31	Unearned Subscription	2	2
Subscription Income
(to adjust unearned revenue to reflect earned portion-S1 million per month for 2months)

So the correct answer is option (b)