Question

In November and December 2017, Lane Co., a newly organized magazine publisher, received $75,000 for 1,000 three-year subscription at $25 per year, starting with the January 2018 issue. Lane included the entire $75,000 in its 2017 income tax return. What amount should Lane report in its 2017 income statement for subscriptions revenue?

Answer 1

Lane Co. should not report any of the $75,000 as subscription revenue in its 2017 income statement, as the subscriptions begin in January 2018. This amount should be recognized as deferred revenue on the balance sheet for 2017.

Step-by-step explanation:

Lane Co., as a magazine publisher, should recognize revenue for subscriptions based on the accrual accounting principle. This means that the revenue reported in the income statement should correspond to the delivery of the magazine issues.

Since the subscriptions start in January 2018, and there were no deliveries in 2017, Lane Co. should not report any of the $75,000 as subscription revenue in its 2017 income statement. Instead, this amount should be recorded as deferred revenue on the balance sheet at the end of 2017 and recognized as revenue over the three-year period of the magazine subscription.