Question

AMC Entertainment Holdings, Inc. (NYSE: AMC (Links to an external site.)Links to an external site.), also known as AMC Theatres, recently announced a $19.95 per month subscription service, AMC Stubs A-List (Links to an external site.)Links to an external site., to compete with MoviePass. With the A-List program, subscribers can see up to three movies per week with few restrictions. The minimum commitment is three months, after which time the subscriber can cancel at any time.

Just as a point of comparison, the cost of MoviePass is between $7.95 – $9.95 per month. Depending on the plan, MoviePass subscribers can see up to one movie per day, subject to restrictions. Subscribers can cancel at any time. MoviePass stock has fallen greatly in recent weeks because investors do not see its business model as sustainable. MoviePass has significantly more expenses than revenues and its cash is dwindling rapidly.

1. Assume that a new subscriber signs up for the AMC Stubs A-List program and pays $19.95 for the first month on August 1. On what day will AMC be able to recognize that first $19.95 as revenue?

2. If AMC charges a new subscriber for the first three months (the minimum commitment) when the subscriber signs up for the A-List program, when will AMC recognize the revenue from the first three months for that new subscription? How would the three-month prepayment be recorded initially by AMC?

3. Currently, AMC does not have an annual A-List payment option. Assume, however, that AMC rolls out an annual plan that allows subscribers to pay in one lump sum at the beginning of the subscription year for the A-List plan. When would AMC recognize revenue from this annual plan?

Answer 1

Revenue from the performance of services is recognized in the period he services have been rendered and are able to be billed by the entity.

1. $ 19.95 can be recognised on August 31 because the services afre fully delivered on this date.

Different companies could require different revenue recognition rules and may decide to accrue revenue on a daily or monthly basis depending on the level of accuracy required.

2. The three Month prepayment would be included as unearned revenue. Cash woule be devitred and unearned revenue will be credited when the company receives subscription for the three momth period. AMC will recognise revenye of $ 19.95 on the end of each month i.e when the monthly services are delivered in full.

3. AMC cannot recognise the revenue till the revenue has realised or is realisable and is incurred. The subscription fees, after 3 months may be returned to the customer if they so chooses. Thus the revenue from subscrition can be recognised only when the services are fully delivered for the period to which the revenue relates. The whole amount received towards Annual subscription can thus be recognised when the services are rendered and the cancellation privileges are expired.