In November and December 2011, Gee Company, a newly organized magazine publisher, received $36,000 for 1,000 three-year subscriptions as $12 per year, starting with the January 2012 issue of the magazine.
How much should Gee report in its 2011 income statement for subscriptions revenue on an accural basis? How uch revenue would be reported in 2011 on a cash basis?
To determine how much Gee Company should report in its 2011 income statement for subscription revenue on an accrual basis, we need to consider the accounting principle of revenue recognition. According to the revenue recognition principle, revenue should be recognized when it is earned, regardless of when the cash is actually received.
In this case, Gee Company received payment for 1,000 three-year subscriptions at $12 per year, starting with the January 2012 issue. This means that the revenue should be recognized over the three-year period covered by the subscription, rather than all at once in 2011.
Since each subscription is for three years and Gee Company received payment for the entire subscription period, the subscription revenue earned in 2011 should only account for the portion of the subscription period that falls within that year.
In this case, the January 2012 issue marks the beginning of the subscription period. Since Gee Company received payment for the entire period in advance, the remaining portion of the subscription period attributable to 2011 is limited to December 2011.
To calculate the portion of the subscription revenue that should be recognized in 2011 on an accrual basis, we can determine the number of months remaining in the subscription period during December 2011, and then multiply it by the monthly subscription revenue.
Let's break it down:
1. Determine the number of months remaining in the subscription period during December 2011:
Since the subscription starts with the January 2012 issue, there are 12 months in a year, and the subscription is for three years, we have: 12 months/year * 3 years = 36 months.
Since December is the last month of 2011, the number of months remaining in the subscription period during December 2011 is: 36 months - 11 months = 25 months.
2. Calculate the monthly subscription revenue:
Each subscription costs $12 per year, so the monthly subscription revenue is: $12 / 12 months = $1 per month.
3. Calculate the subscription revenue earned in 2011 on an accrual basis:
Revenue = Number of months remaining * Monthly subscription revenue
= 25 months * $1 per month
= $25
Therefore, Gee Company should report $25 in its 2011 income statement for subscription revenue on an accrual basis.
Now, let's consider the subscription revenue on a cash basis. This approach recognizes revenue only when cash is received, regardless of when the revenue is actually earned.
Since Gee Company received $36,000 in November and December 2011 for the 1,000 subscriptions, the revenue reported on a cash basis for 2011 would be $36,000.
In summary:
- Subscription revenue reported in Gee Company's 2011 income statement on an accrual basis: $25
- Subscription revenue reported in Gee Company's 2011 income statement on a cash basis: $36,000