Question

A New York City daily newspaper called “Manhattan Today” charges an annual subscription fee of $135. Customers prepay their subscriptions and receive 260 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $130 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 $125 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 $130 subscription price? 

2. How many performance obligations exist in this contract? 3. Prepare the journal entry to recognize sale of 10 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

Answer 1

Performance obligations; customer option for additional goods or services; prepayment:

 

Requirement: 1

The revenue recognized by “M” under subscription fee is $0.

“M” is already getting the subscription fee, but the service or goods are not transferred. Therefore, the fee is taken into account as deferred revenue. Deferred revenue is converted to revenue at once the newspapers are delivered.

 

Requirement: 2

Number of performance obligations is two:

1) Delivery of newspapers

2) 40% discount coupon for carriage ride

 

Condition of performance obligation satisfied (at least one condition should fulfill):

• The consumer should utilize the seller’s work as it is performed

• The customer can control the assets at any stage

• Even, when there is no alternate usage of creating assets by a consumer and he cancels a contract, the seller can get his payment till its progress.

 

The discount coupon is identifiable as separately. But which is highly interrelated with delivering newspapers. The seller is not responsible until it is created as a product. Therefore, the discount coupon qualifies as performance obligation.

 

Requirement: 3

Calculation of stand-alone selling price of coupon:

 

It is given that the value of the coupon is $50 ($125×40%) and estimated redemption is 30%.

 

Now, calculate the stand-alone selling price of coupon:

Stand-alone selling price of coupon = (Value of the coupon × Estimated redemption)

                                                          = $50 × 30%

                                                          = $15

 

Hence, the calculated stand-alone selling price of coupon is $15.

 

Calculation of total stand-alone price:

It is given that the stand-alone selling price of a normal subscription is $135 and calculated stand-alone selling price of coupon is $15.

 

Now, calculate the total stand-alone price:

Total stand-alone price = (Stand-alone selling price of a normal subscription +

                                                Stand-alone selling price of coupon)

                                          = $135 + $15

                                          = $150

Hence, the calculated total stand-alone price is $150.

Calculation of coupon percentage:

The calculated stand-alone selling price of coupon is $15 and given stand-alone selling price of a normal subscription is $135.

Now, calculate the coupon percentage:

Coupon percentage = Stand-alone selling price of coupon / (Stand-alone selling price

                                        of coupon + Stand-alone selling price of a normal subscription)

                                    = $15/($15 + $135)

                                    = $15/150

                                    = 10%

 

Hence, the calculated coupon percentage is 10%

 

Calculation of subscription percentage:

The calculated stand-alone selling price of coupon is $15 and given stand-alone selling price of a normal subscription is $135.

 

Now, calculate the subscription percentage:

Subscription percentage = Stand-alone selling price of a normal subscription/(Stand-alone selling price of

                                                coupon + Stand-alone selling price of a normal subscription)

                                            = $135/($15 + $135)

                                            = $135/150

                                            = 90%

 

Hence, the calculated subscription percentage is 90%.

 

Calculation of selling price of coupon:

It is given that the transaction price is $130, number of subscription is 10, and calculated coupon percentage is 10%.

 

Now, calculate the selling price of coupon:

Selling price of coupon = [(Transaction price × Coupon percentage) × Number of subscription]

                                          = [($130 × 10%) × 10]

                                          = $13 × 10

                                       = $130

 

Hence, the calculated selling price of coupon is $130.

 

Calculation of selling price of subscription:

It is given that the transaction price is $130, number of subscription is 10, and calculated coupon percentage is 90%.

 

Now, calculate the selling price of subscription:

Selling price of subscription = [(Transaction price × Subscription percentage) × Number of subscription]

                                                  = [($130 × 90%) × 10]

                                                  = $117 × 10

                                                  = $1,170

 

Hence, the calculated selling price of subscription is $1,170.

 

Journal entry:

 

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cash		$1,300
	Deferred revenue – subscription			$1,170
	Deferred revenue – coupon			$130
	(To record service performed)

 

• Cash is an asset. There is an increase in asset value. Therefore, it is debited.

• Service revenue is revenue. There is an increase in liability value. Therefore, it is credited.

• Deferred revenue is revenue. There is an increase in liability value. Therefore, it is credited.

Performance obligations; customer option for additional goods or services; prepayment: