Question

in november and december 2020, lane co., a newly organized magazine publisher, received $75,000 for 1,000 three-year subscriptions at $25 per year, starting with the january 2021 issue. lane included the entire $75,000 in its 2020 income tax return. what amount should lane report in its 2020 income statement for subscriptions revenue? show work for partial credit.

Answer 1

Lane Co. should not report any subscription revenue for the 1,000 three-year subscriptions in its 2020 income statement because the service had not been rendered in that period. Instead, the $75,000 should be recorded as deferred revenue, reflecting future obligations to provide magazines.

Step-by-step explanation:

Lane Co., a magazine publisher, received $75,000 in 2020 for 1,000 three-year subscriptions at $25 per year, starting with the January 2021 issue. According to the accrual accounting principle, companies should recognize revenue when it is earned regardless of when the cash is received. In this case, Lane Co. should recognize subscription revenue in its income statement as the magazines are delivered over the three-year subscription period. Since none of the magazines were delivered in 2020, Lane Co. should not report any subscription revenue in its 2020 income statement for these subscriptions. Instead, the $75,000 received should be recorded as deferred revenue on the balance sheet at the end of 2020, which is a liability that indicates a service is owed to the subscribers.

While Lane Co. included the entire amount in its 2020 income tax return (which may suggest the use of the cash basis accounting for tax purposes), for financial reporting purposes, the company should adhere to the accrual basis of accounting, which better reflects the company's financial position and results of operations for the period.

Answer 2

Lane Co. should report $0 of subscription revenue on the 2020 income statement because the subscriptions begin in 2021, and therefore, none of the revenue is earned in 2020. The $75,000 received should be recorded as deferred revenue, which represents an obligation for the company to deliver services in the future.

Step-by-step explanation:

The question asked concerns the correct accounting treatment for subscription revenue received by Lane Co., a magazine publisher, and how much should be recognized in the 2020 income statement. The company received $75,000 for 1,000 three-year magazine subscriptions, where the service period starts in January 2021. According to the revenue recognition principle under accrual accounting, companies are required to record revenue when it is earned, which in this case, begins in 2021, not when cash is received.

Lane Co. received the payment in advance for services to be provided in the future. Therefore, this $75,000 should be recorded as deferred revenue (a liability) on the balance sheet at the end of 2020. However, for tax purposes, Lane Co. included the entire amount in its income tax return for 2020.

To calculate the amount of subscription revenue to be reported on the 2020 income statement, you would acknowledge that none of the services have been provided in 2020 since the magazine subscriptions start in January 2021. Thus, $0 of subscription revenue should be reported in the 2020 income statement because they pertain to the subscription period of January 2021 through December 2023. The annual subscription rate is $25; therefore, for each of the 1,000 subscriptions, the revenue of $25 would only be recognized at the end of each year of the subscription term, or monthly, as each issue is provided to the subscribers.

In conclusion, despite receiving cash in 2020, Lane Co. should not record any of it as revenue in their 2020 income statement as the service period starts in the subsequent year. For accounting purposes, it reflects the company's future obligation to deliver magazines; thus, it's recorded as deferred revenue.