Question

Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 60,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?

a. Cash 900,000 Unearned
Subscription Revenue 900,000
b. Prepaid Subscriptions 900,000
Cash 900,000 Subscriptions
c. Receivable 150,000
Unearned Subscription Revenue 150,000
d. Subscriptions Receivable 900,000
Subscription Revenue 900,000

Answer 1

The correct entry for Pickett Company's sale of subscriptions is a debit to Cash and a credit to Unearned Subscription Revenue for $900,000, reflecting receipt of cash for services not yet rendered.

Step-by-step explanation:

When Pickett Company sells annual subscriptions for its magazine, the cash received is recorded along with a liability for unearned subscription revenue because the service (magazine delivery) is yet to be performed. Since Pickett Company sells 60,000 subscriptions at $15 each in January, this translates to total cash received of $900,000. The appropriate journal entry would be a debit to Cash for $900,000 and a credit to Unearned Subscription Revenue for $900,000. This records the fact that the company has received cash but has not yet earned it, as the magazines have not been delivered.

Therefore, the correct entry to record the sale of the subscriptions in January would be:

• Cash $900,000
• Unearned Subscription Revenue $900,000

This is an example of deferring revenue recognition until the service is performed in accordance with the accrual basis of accounting.