ABC Company sold subscriptions to customers based on the follo...

Question

ABC Company sold subscriptions to customers based on the following timeline:

September 1 Sold one-year subscriptions, collecting cash of $3,600, plus sales taxes of 10%.
October 31 Paid the sales taxes to the state taxing authority.
December 31 Recorded necessary year-end adjusting entries

Prepare journal entries for each of the events provided.

Accepted Answer

Alright, let's see how you guys did with this one. It might be a little tricky because we're dealing with unearned revenue. Let's see how you did. ABC Company sold subscriptions to customers based on the following timeline and we've got 3 dates here. Prepare journal entries for each of the events provided. So let's go ahead and go 1 by 1. Let's start with the September 1st journal entry. So September 1st, what happened? Sold 1 year subscriptions collecting cash of 36,000 plus sales taxes of 10%. Okay? So on September 1st, we collected cash of 36,000 excuse me, 3600, 3,600 plus 10% of that in cash. So it's actually we collected a little more cash, right? Because it says 36100 in cash. Well, that's gonna be our revenue plus sales taxes of 10%. Okay? So you got to read into it a little bit, make sure we get it just right. So what is this gonna be mean to us? Well, we know our revenue. This is our gonna be our revenue right here. Because we collected that much in cash for our revenue and then it says plus sales taxes, so we collected a little extra in cash. So our sales tax is going to be 36100 times 10%, so 0.10 and that's going to be $3.60, right? That's going to be the sales taxes that we owe to the government. So what's our total cash collected? Cash? Well, it's going to be the 36100 that we got in revenue plus the 360. So that comes out to 3,960, right? 3,960 is the total cash collected which includes the 36100 for the actual subscriptions and then the other 360 which was sales taxes. Now, we've got a little bit of a trick here because this isn't actually revenue yet. Let's think about it. Our cash collected was 3,960, but now instead of crediting revenue, think about what we sold here. We sold a 1 year subscription, right? So you can imagine this is a magazine and we sold a subscription up front but have we earned that revenue yet? We haven't given any magazines to the customers, right? We're gonna be giving magazines maybe month over month for the next year. So we haven't earned any of that revenue. If we don't end up delivering magazines to the customer, they're going to get upset and we're going to have to give them a refund. So we haven't earned any revenue. We have a liability to the customer to supply magazines or whatever they're subscribed to in the future. So instead of crediting revenue itself, we haven't earned the revenue so it's not revenue yet, it's unearned revenue. So we have to credit a liability for unearned revenue. So we're gonna have unearned revenue instead of revenue in this problem and that's gonna be the 36100 that the company collected for their magazine subscriptions or whatever they're selling And the rest of it is going to be the sales tax payable, right? So in this case, we don't have revenue yet, we have 2 liabilities. We have the liability of 36100 to deliver magazines to the customer and then we also have the liability to give cash to the government. So we haven't earned any revenue at this point. We're going to earn that revenue over time as time passes and the subscription begins to expire. Okay? So that's going to be our entry on September 1st. We collected cash, we have unearned revenue until we until time passes and we start delivering the product. And finally, the sales tax payable. So 2 liabilities there. Let's move on to the October 31st entry. So October 31st, what was the event on Halloween? Well, we paid the sales taxes to the state taxing authority. What a spooky Halloween event. Okay? So the sales taxes got paid to the taxing authority. Well, that means that we paid them in cash. We no longer have the sales tax liability and we don't have that cash because we paid for it. So we're gonna debit sales tax payable in the amount of 3.60, right? This is the amount we owed to the government and we finally paid them. So we're going to credit cash for 3.60. That's the amount that we paid them. Cool? So that entry is pretty simple, that's just us paying off our liability. And now what happens on December 31st? We need to record necessary year end adjusting entries. So what year end adjusting entry might we have here? It's going to be for that unearned revenue, right? We've earned some of the revenue. We sold the subscription on September 1st and now it's December 31st. Some time has passed and we've earned some revenue, okay? So let's go ahead and see how much revenue we've earned. I'm gonna do the December 31st entry here on the right. So this will be December 31st. We're gonna do the entry over here. Alright, let's think about how much revenue we've earned. This is a 1 year subscription, right? So we're gonna earn 1 12th of that per month. So let's see how much we earn every month. We're gonna have 36100 in total sales, we're gonna divide that by 12 months. So 36100 divided by 12, well that's 300 per month that we're earning, right? So let's go ahead and see how many months have passed. So 300 per month, well we've got September, we earned our revenue. October, we earned November December. We've earned 4 out of the 12 months of revenue, right? This subscription is gonna last a year. Well we've earned 4 months out of those 12 months, so we've earned let me get out of the way here so I can finish the calculation. It's been 4 months so we've earned $300 a month. We've earned that for 4 months and that means we've earned 1200 in earned revenue. Okay? So as time keeps passing, we're gonna keep earning more and more of that until we have no more unearned revenue and it is all earned revenue. So what's going to be our entry here? Well, we're going to have to debit unearned revenue, right? We need to lower that liability because we're no longer liable for a whole 36100 worth, we've earned some of it. So we're gonna debit unearned revenue in the amount of 1200. What do you think our credit is gonna be here? Well, we earn the revenue, so we're gonna have a credit to revenue, right? We have the earned revenue which is actually gonna go to the income statement and that's gonna be in the amount of 1200 as well. Okay? So if you guys are struggling with the unearned revenue and earning revenue, I suggest you go back to our adjusting entries that we studied earlier and review the video on unearned revenue And remember, that over time, we're going to be earning the revenue as the time passes or as we deliver products to the customer. It all depends, okay? So this is about it for this question. We've got our 3 entries. 1st, when we collect the cash, then we have our remittance to the government and then finally an adjusting entry for our unearned revenue. Cool? Let's go ahead and move on to the next video.

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