Aneen's Video Mart sells one- and two-year mail order subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:
Year 1 Year 2
Sales 420,000 500,000
Less cancellations 20,000 30,000
————– —————
Net sales 400,000. 470,000
Subscription expirations:
Subscriptions Sold in Year 1 Subscriptions Sold in Year 2
Year 1 $120,000
Year 2 155,000 $130,000
Year 3 125,000 200,000
Year 4 140,000 $400,000
——————- ——————
$ 400,000 $470,000
In Aneen's December 31, Year 2, balance sheet, the balance for unearned subscription revenue should be:
A. $465,000
B. $495,000
C. $470,000
D. $340,000
Explanation
Choice “A” is correct. $465,000 unearned subscription revenue.
FYI–> The Analysis of the recorded sales activities shows on below:
Year 1 Year 2
Sales 420,000 500,000
Less cancellations 20,000 30,000
————– —————
Net sales 400,000. 470,000
Year 1
–> So, Every Year you earn subscription Revenue ( or prepayment revenue ) related to sales. In Yr. 1 and in column 2 is each year you earn the subscriptions revenues related to sales in Yr.2.
–> In the above you have Net sale of $400,000 in Yr. 1 and off this $400,000 your have earned 275,000 by the end of year 2–>( Yr.1 $120,000 + 155,000 Yr. 2 = 275,000)
Which this means that the amount of un-earned revenue is below:
125,000->(400,000 (Net Sale) – 275,000(earned revenue by the end of year 2)=125,000)
so 125,000 at the end of Yr.2 is $125,000 which is subscriptions sales from Year 1 deferred (unearned) at the end of Year 2.
Year 2:
—> In year 2 we have Net sale of $470,000 and of this $470,000 we have earned only $130,000 subscription sold in Year 2 and as you can see there is nothing sold in Year 1 so only Year 2.
Which this means that the amount of un-earned revenue is below:
—> $470,000 (Net Sales) – 130,000 ( subscription sold in Year 2) = 340,000 is the un-earned revenue.
–> And the total of un-earned subscription revenue at the December 31, Year 2 is the following: 125,000 (from Yr 1) + 340,000 (from Yr 2) = 465,000 un-earned subscription revenue.
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