Question

A New York City daily newspaper called “Manhattan Today” charges an annual subscription fee of $594. Customers prepay their subscriptions and receive 290 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $560 for an annual subscription that also would include a coupon to receive a 40% discount on a one-hour ride through Central Park in a horse-drawn carriage. The list price of a carriage ride is $550 per hour. The company estimates that approximately 30% of the coupons will be redeemed.

Required:

1. How much revenue should Manhattan Today recognize upon receipt of the $560 subscription price?

2. How many performance obligations exist in this contract?

3. Prepare the journal entry to recognize sale of 11 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

Answer 1

Solution:

1) Revenue to be recognized : $ 0.

Reason: As it is an prepayment, revenue should not be recognized until there is transfer of goods or services by Manhattan Today to the customer.

2) Number of performance obligations : 2

Reason: Delivery of newspapers is the first performance obligation. The coupon for a 40% discount on the carriage ride through Central Park is the second performance obligation.

3)

General Journal	Debit	Credit
Cash	6160		=560*11
Deferred revenue—subscription		5544	=6160*90%
Deferred revenue—discount coupon		616	=6160*10%
Workings:
Stand­alone selling price of coupon	66	=550*40%*30%
Stand­alone selling price of subscription	594
Total of stand­alone prices	660
Percentage allocated to—subscription	90%	=594/660
percentage allocated to—discount coupon	10%	=66/660

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