Question

The Metropolitan Opera Association, Inc., was founded in 1883 and is widely regarded as one of the world's greatest opera companies. The Metropolitan's performance run from September to May, and the season may consisted of more than two dozen different operas. Many of the opera's loyal subscribers purchase tickets for the upcoming season prior to the end of the opera's fiscal year end at July 31. In its annual report, the Metropolitan recognizes a Deferred Revenue liability that is defined in their footnotes as follows. "Advance ticket sales, representing the receipt of payments for ticket sales for the net opera season, are reported as deferred revenue in the consolidated balance sheets." Ticket sales are recognized as box office revenue "on a specific performance basis."

Fiscial year ended July 31 Revenue Deferred revenue
2017 $88,514 $43,649
2016 87582 46,609
2015 90952 47801
2014 91,319 40,259

Required:
a. What revenue recognition principle(s) drive The Metropolitan Opera's deferral of advance ticket purchases?
b. Recreate the summary journal entries to recognize ticket sales revenue (box office and tours) for The Metropolitan Opera's fiscal year 2017 and advance sales for the fiscal year 2018 season. (Assume that advance ticket sales extend no further than the next year's opera season.)
c. The Metropolitan Opera's season changes every year. At the end of each fiscal year, management of the opera can observe the revenue generated by the season just concluded and also its subscribers' enthusiasm for the upcoming season. How might that information be used in managing the organization?

Answer 1

The Metropolitan Opera defers advance ticket purchases in accordance with the matching principle. The journal entries for recognizing ticket sales revenue can be made by debiting and crediting the appropriate accounts. The information about revenue generated and subscriber enthusiasm can be used to make informed management decisions.

Step-by-step explanation:

a. The revenue recognition principle that drives The Metropolitan Opera's deferral of advance ticket purchases is the matching principle. This principle states that revenue should be recognized when it is earned and matched with the expenses incurred to generate that revenue. By deferring the revenue from advance ticket sales, The Metropolitan Opera is aligning the recognition of revenue with the opera performances that the tickets are purchased for.

b. To recognize ticket sales revenue for The Metropolitan Opera's fiscal year 2017 and advance sales for the fiscal year 2018 season, the following journal entries can be made:

1. Debit: Accounts Receivable - Box Office Revenue
2. Credit: Deferred Revenue - Advance Ticket Sales
3. Debit: Deferred Revenue - Advance Ticket Sales
4. Credit: Box Office Revenue

c. The information about the revenue generated by the just-concluded season and subscribers' enthusiasm for the upcoming season can be used by management of The Metropolitan Opera to make informed decisions about programming, marketing, and pricing for future seasons. It can help them understand which operas were successful and popular among audiences, and which ones may need adjustments or changes.

Answer 2

Answer: See explanation

Step-by-step explanation:

a. Based on International Accounting Standards (IAS) 15, it should be juted that revenue can be recognized in situations whereby those who in advance have already subscribe for tickets for the Opera show view the performance.

Revenue is recognized when the customers receives his or her good or enjoy the services and if that hasn't happened, there should be a deferment of the recognition for revenue and therefore every advance ticket purchased will be deferred liability.

b. Date Particulars Debit Credit

Dec-17 Dr Ticket sales receivable $1,31,163.00

Cr Deferred revenue Liability $42,649.00

Cr Revenue from Opera Shows $88,514.00

c. When the defered revenue and the revenue from 2014 - 2017 are compared, we can see that the deferred revenue is about 46%-54% of the total revenue.

The information will be useful to The Metropolitan Opera Association Inc. in order for them to predict revenue and hence plan their budget accordingly and tailor it towards achievement of organization goals and objectives.