deferred revenue for magazine subscriptions

CPA Exam Forum FAR FAR Review deferred revenue for magazine subscriptions

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    MCQ #445

    Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to 20X1 are as follows:

    Deferred subscription revenue (January 1, 20X1) $ 750,000
    Cash receipts from subscribers 3,600,000
    In its December 31, 20X1, balance sheet, Winn should report deferred subscription revenue of:


    Incorrect B.



    This company gets $10,000 in cash. It sound to me like the customers who sign up and pay October 1st to October 15th do not receive a shipped magazine on October 15th. That means there's 90 days X 10,000 = 900,000 dollars of cash you collect without ever providing a magazine.

    Then there's also 180 days from April 1st to Sept 30th where you take in 1,800,000, but only earn half of it by sending out 1 of 2 semi annual publications in October. So that means half of the 1.8M is still deferred revenue.

    By my math, the total deferred revenue is then 900K + 900K = $1.8M. Where did I go wrong?


    This question looks familiar – I may have worked it before. I pulled a 62 on FAR last month, so consider me no expert.

    Key dates: April 1, October 1, December 31.

    April 1: Recognize 900 from this year, 900 that was deferred from last year.
    October 1: Recognize 1,800 from April 1-September 30.
    December 31: Recognize 0 and defer 900.

    Answer should be D.

    Sticky Nicky
    Sticky Nicky

    yup answer is D. Simple way to look at it is this:

    1) All deferred revenues at 1/1 will be realized when they send out the first edition so its irrelevant
    2) Cash is received evenly throughout the year is the KEYYYY to this problem. Just break it down by month. 3,600,000/12=300k per month.
    3)Everything after Sept 30 is deferred so you have 3 months deferred (Oct, Nov, Dec) 3x300k=900k DONE!



    Why is the cash collected up to October 1st recognized?

    If you subscribe on June 15th, I've only delivered 1 issue of a 2-issue subscription. So half of it should be recognized and half should be unearned revenue right?

    Sticky Nicky
    Sticky Nicky

    the question doesnt say that the sub is for 2 scripts just that they print 2 yearly



    Well the question doesn't say the subscription is for one publication either

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