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A New York City daily newspaper called Manhattan Today charges an annual subscription fee

Updated July 5, 2024

A New York City daily newspaper called Manhattan Today charges an annual subscription fee of $216. Customers prepay their subscriptions and receive 200 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $210 for an annual subscription that also includes 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.

Requirements:

  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 the sale of 14 new subscriptions, clearly identifying the revenue or deferred revenue associated with each performance obligation.

1 Answer

Verified archive
AnonymousJuly 5, 2024

1. Revenue Recognition upon Receipt of $210: The $210 subscription price consists of two components:

  • Subscription to the newspaper.
  • Coupon for a discounted carriage ride.

First, we allocate the transaction price to each performance obligation based on their relative standalone selling prices.

  • Standalone selling price of the subscription: $216
  • Standalone selling price of the carriage ride discount: $200 * 40% = $80
  • Total standalone selling prices: $216 + $80 = $296

The allocation to each component based on their relative standalone selling prices:

  • Subscription allocation: 216296×210≈153.38\frac{216}{296} \times 210 \approx 153.38
  • Coupon allocation: 80296×210≈56.62\frac{80}{296} \times 210 \approx 56.62

So, the revenue recognized upon receipt of $210:

  • Subscription: $153.38
  • Coupon: $56.62 (but deferred and recognized when the coupon is redeemed or expires)

2. Performance Obligations: There are two performance obligations:

  1. Providing the newspaper subscription.
  2. Providing the coupon for the discounted carriage ride.

3. Journal Entry for Sale of 14 New Subscriptions:

  • Total cash received: 14×210=294014 \times 210 = 2940
  • Allocated to subscription revenue: 14×153.38≈2147.3214 \times 153.38 \approx 2147.32
  • Allocated to deferred revenue for coupons: 14×56.62≈792.6814 \times 56.62 \approx 792.68

The journal entry will be:

No Transaction General Journal Debit Credit
A 1 Cash 2,940
Deferred revenue – subscription 2,147.32
Deferred revenue – coupons 792.68