Question

Q1

During December 2009, Fashion Vixen Publishing sold 2,000 12-month annual magazine subscriptions at a rate of $20 each. The first issues were mailed in February 2009. Prepare the entries on Fashion Vixen’s books to record the sale of the subscriptions and the mailing of the first issues.

Q2

On December 1, B-win Company introduces a new product that includes a one-year warranty on parts. In December, 200 units are sold. Management believes that 2% of the units will be defective and that the average warranty costs will be $30 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost

Q3

During December 2008, Fashion Vixen Publishing sold 2,500 12-month annual magazine subscriptions at a rate of $30 each. The first issues were mailed in February 2009. Prepare the entries on Fashion Vixen’s books to record the sale of the subscriptions and the mailing of the first issues.

Answer 1

A1:

—> When Subscription Received Dec-08

Cash/Bank A/C Dr $40000 (2000*20)

To Subscription Liability A/C $40000

–> When First issues of Magazine Delivered - Feb-09

Subscription Liability A/C Dr $3333.33 (40000*12)

To Deferred Subscription Income $33————————————————————————-

A2:Caluclation Of Estimated Warranty Cost

Estimated Warranty Cost = 200U*2%*$30=$120

Entry on Dec 31:

Warranty Cost A/C Dr $120

  To Provision for Warranty Cost A/C $120

————————————————————————

A3:

—> When Subscription Received Dec-08

Cash/Bank A/C Dr $75000 (2500*30)

To Subscription Liability A/C $75000

–> When First issues of Magazine Delivered - Feb-09

Subscription Liability A/C Dr $6250 (75000*12)

To Deferred Subscription Income $6250

————————————————————————-

**Note: For Q1 and Q3 we have to recognize the entire Subscription revenue as ‘Subscription Liability‘ at the time of sale of Subscription as our performance obligations is still pending and recognize the revenue as deferred revenue at the each time of satisfaction of performance obligation i.e as when the magazines are maliled.