Question

Sunshine Publications collects magazine subscriptions from customers at the time subscriptions are sold. Revenue is recognized over the term of the subscription. Sunshine sold 10,000 12-month subscriptions in January for $24 each. On February 20, Sunshine delivers the first issue of its magazine. What are the journal entries to be recorded in January and to be recorded on Feb. 20?

Answer 1

In January, Sunshine Publications records cash collected for magazine subscriptions as unearned revenue, while on February 20, it recognizes revenue for the first issue delivered, allocating one-twelfth of the annual subscription fee per subscriber.

Step-by-step explanation:

In January, when Sunshine Publications sells the magazine subscriptions, it collects the cash upfront but cannot recognize the revenue immediately as the service has not yet been provided. Instead, it records the initial cash collection as a liability on its balance sheet, reflecting that it owes the delivery of magazine issues. The journal entry in January is therefore as follows:

• Debit Cash $240,000 (10,000 subscriptions x $24 each)
• Credit Unearned Revenue $240,000

On February 20, when the first issue is delivered, the company would recognize revenue for the magazines delivered. Since the subscriptions are for 12 months, each month, Sunshine Publications can recognize one-twelfth of the annual subscription fee per subscriber as revenue. The journal entry on February 20 would be as follows:

• Debit Unearned Revenue $20,000 (1/12 of $240,000)
• Credit Revenue $20,000

This reflects that Sunshine Publications has fulfilled a portion of its service obligation, and therefore, it can now recognize that portion of cash collected as revenue.