Question

A New York City daily newspaper called “Manhattan Today” charges an annual subscription fee of $216. Customers prepay their subscriptions and receive 260 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $210 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 $200 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 $210 subscription price? 2. How many performance obligations exist in this contract? 3. Prepare the journal entry to recognize sale of 15 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

Answer 1

1. The amount of revenue Manhattan Today should recognize upon receipt of the subscription fee is $ 0 .

Inspite of Manhattan Today receiving payments from customers for an annual subscription, payment of the subscription activity does not transfer goods or services to customers. Therefore the annual fee is viewed as a prepayment for future delivery of goods or services and would be recognized as deferred revenue subscription when received. When the newspapers are delivered, deferred revenue subscription would be reduced and the revenue will be recognized.

2. The number of performace obligations in this contract are 2.

The first performace obligation is delivering newspapers. Thc coupon for a 40% discount on a carriage ride is the second performance obligation. This is because firstly it is an option that conveys a material right to the recipient and secondly is is both capable to being distinct, as it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering newspapers. The seller's role is not to integrate and customize them to create 1 product. The seller will record deferred revenue - coupon for that performance obligation and recognize revenue when either the coupons are exercised or Manhattan Today estimates that they will not be redeemed.

3. Upon receiving the fee for 15 subscriptions, the journal entry is:

Cash (15 x $210) $ 3,150

Deferred Revenue - Subscription (15 x $189) $ 2,835

Deferred Revenue - Discount Coupon(15 x $21) $ 315

Value of the coupon = 40% discount x $200 carriage fee = $ 80

Estimated redemption x 30%

Stand-alone selling price of a coupon $ 24

Stand-alone selling price of a normal subscription $ 216

Total of stand-alone prices $ 240

Manhattan Today must identify each performance obligation's share of the sum of the stand-alone selling prices of all deliverables:

Coupon = $24 / ($24 + $216) = 10%

Subscription = $216 / ($24 + $216) = 90%

$ 210 Transaction Price:

90% = $ 189 Subscription

10% = $ 21 Coupon