Question

Horse Country Living publishes a monthly magazine for which a 12-month subscription costs $30. All subscriptions require payment of the full $30 in advance. On August 1, the balance in the Subscriptions Received in Advance account was $40,500. During the month of August, the company sold 900 yearly subscriptions. After the adjusting entry at the end of August, the balance in the Subscriptions Received in Advance account is $60,000.

Required
1)Identify and analyze the transaction to record the sale of the 900 yearly subscriptions during the month of August
2)Identify and adjust the sale on August 31
3)Assume that the accountant made the correct entry during August to record the sale of the 900 subscriptions but forgot to make the adjustments on August 31. Would net income for August be overstated or understated? Explain your answer

Answer 1

(1)

Cash 27,000

Subscriptions Received in Advance 27,000

(2)

Subscriptions Received in Advance 7,500

Subscriptions Received 7,500

(3)

It woulbe be understated. Because the August adjustment recognize revenues. If it wasn't done, then revenues are less than it should be. So net income is understated.

Step-by-step explanation:

(1)

At the beginning of the year the subscription represent an obligation to the business, it must deliver their magazines, the revenue is not earned.

total amount900 x 0 = 27,000

(2)

beginning + new subcription - ending = earned revenue

40,500 + 27,000 - 60,000 = 7,500

(3)

It woulbe be understated. Because the August adjustment recognize revenues. If it wasn't done, then revenues are less than it should be. So net income is understated.