Question

Mammoth Publishing. Incorporated owns a weekly magazine called "Nova Health," and sells annual subscriptions for $78. Customers prepay their subscription fee and receive 52 issues starting in the following month. The company also offers new subscribers a 20% discount coupon on its other weekly magazine called "Fishing & Camping." which has a list price of $60 for an annual subscription. Mammoth estimates that approximately 10% of the discount coupons will be redeemed.

Required:
(a) How many performance obligations are in a single subscription contract?
(b) Prepare the journal entry to account for one new subscription of "Nova Health." clearly identifying the revenue or deferred revenue associated with each performance obligation.

Answer 1

A single Nova Health subscription contract with Mammoth Publishing includes two performance obligations: delivery of the magazine issues and the discounted coupon offer for another magazine. The journal entry for a new subscription records a debit to Cash and credits to Deferred Revenue for both Nova Health and the Coupon Discount.

Step-by-step explanation:

In a single subscription contract for 'Nova Health,' Mammoth Publishing, Incorporated has two performance obligations. The first obligation is the delivery of 52 issues of 'Nova Health,' while the second is the offer of a discount coupon for the 'Fishing & Camping' magazine. The discount is a separate performance obligation as it provides an additional benefit to the customer that is distinct from the subscription itself.

Here is the journal entry to account for one new subscription of 'Nova Health':

• Debit Cash: $78 (To record cash received from the customer for the subscription)
• Credit Deferred Revenue - Nova Health: $70.20 (To record the liability for delivering future issues, calculated as 90% of the subscription fee since 10% relate to the coupon performance obligation)
• Credit Deferred Revenue - Coupon Discount: $7.80 (To record the liability for the expected redemption of the discount coupon, calculated as 20% of $60 with the expectation that 10% will be redeemed)

Answer 2

There are two performance obligations in a single subscription contract: the subscription to the 'Nova Health' magazine and the discount coupon for the 'Fishing & Camping' magazine. The journal entry to account for one new subscription of 'Nova Health' would involve recording the cash received, recognizing unearned revenue, and accounting for the estimated redemption of the discount coupon.

Step-by-step explanation:

(a) There are two performance obligations in a single subscription contract: the subscription to the 'Nova Health' magazine and the discount coupon for the 'Fishing & Camping' magazine.

(b) The journal entry to account for one new subscription of 'Nova Health' would be:

1. Debit: Cash - $78 (for the subscription fee received)
2. Credit: Unearned Revenue - $78 (to recognize the revenue associated with the subscription)
3. Credit: Discount Expense - $6 (to account for the estimated redemption of the discount coupon)