Question

Exercise 6-7 (Algo) Performance obligations; customer option for additional goods or services; prepayment (LO6-3, 6-4, 6-5] A New York City daily newspaper called "Manhattan Today” charges an annual subscription fee of $540. Customers prepay their subscriptions and receive 270 issues over the year. To attract more subscribers, the company offered new subscribers the ability to pay $510 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 $500 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 $510 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

1
Revenue = $0
2
Number of performance obligations = 2
3
General Journal	Debit	Credit
Cash	7650		=510*15
Deferred revenue—subscription		6885	=7650*90%
Deferred revenue—discount coupon		765	=7650*10%
Workings:
Stand­alone selling price of coupon	60	=500*40%*30%
Stand­alone selling price of subscription	540
Total of stand­alone prices	600
Percentage allocated to—subscription	90%	=540/600
percentage allocated to—discount coupon	10%	=60/600