Question

A New York City daily newspaper called "Manhattan Today" charges an annual subscription fee of $216. Customers prepay their subscriptions and receive 260 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $210 for an annual subscription that also would include a coupon to receive a 40% discount on a one-hour ride through Central Park in a horse-drawn carriage. The list price of a carriage ride is $200 per hour. The company estimates that approximately 30% of the coupons will be redeemed. Required: 1. How much revenue should Manhattan Today recognize upon receipt of the $210 subscription price? 2. How many performance obligations exist in this contract? 3. Prepare the journal entry to recognize sale of 15 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

Answer 1

Answer:

Explanation:

1. The amount which is to be recognized is zero as payment is not made and the transfer of goods and services is not there. So, no revenue should be recorded. It is deemed to be a deferred revenue

2.  There are two performance obligations exist in this contract. The one is newspapers delivery and the second one is coupon through which the 40% discount is received on one- hour ride

3. The journal entry is shown below:

Cash A/c Dr $3,150        ($210 × 15 new subscriptions)

       To Deferred revenue - subscription $2,835

       To Deferred revenue - discount        $315

(Being sale for both alternative is recorded)

For allocating the amount to each one, first we have to find out the allocated percentage for this we have to compute the total price which is shown below:

= List price × coupon discount × redeemed discount + annual subscription fee

= $200 × 40% × 30% + $216

= $240

So, the percentage of deferred revenue = (List price × coupon discount × redeemed discount) ÷ Total price

= $24 ÷ 240

= 10%

And, the remaining is allocated to the subscription