On March 31, 2007, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five different magazines. The subscriptions are starting immediately. What is the adjusting entry that should be recorded by Melanie Publishing Company on December 31, 2007?

Question

BlackTom AI · Accepted Answer

Revenue is recognized as it is earned. Melanie received cash in advance for a 3‑year subscription, so the amount was initially recorded as a liability (Unearned Fees) and must be recognized as Fees Earned over the subscription term.

Step 1 — initial facts and unit measure:
- Total payment = $15,480 for 3 years.
- 3 years = 36 months.

Step 2 — compute the monthly earned amount:
- Monthly revenue = $15,480 ÷ 36 = $430 per month.

Step 3 — determine months earned by December 31, 2007:
- Subscriptions start immediately on March 31, 2007. By December 31, 2007 the publisher has provided service for the months April through December inclusive = 9 months of service recognized in 2007.

Step 4 — calculate revenue to recognize in the adjusting entry:
- Revenue recognized = $430 × 9 months = $3,870.

Step 5 — prepare the adjusting journal entry:
- Debit Unearned Fees $3,870 (to reduce the liability that was recorded when cash was received).
- Credit Fees Earned $3,870 (to record the revenue earned during the period).

Why this is correct:
- Cash was already received on March 31, so the adjusting entry does not affect Cash; it reclassifies the earned portion of the liability to revenue.
- The amount $3,870 equals the exactly proportionate share of the three‑year payment that applies to the nine months of service provided by year end.

Why other entries would be wrong (briefly):
- Debiting Cash would be incorrect because no additional cash is received.
- Crediting Unearned Fees alone without recognizing Fees Earned would understate revenue.
- Using a different number of months (e.g., 10 or 8) or a different monthly rate would produce an incorrect dollar amount.

Conclusion: The correct adjusting entry on December 31, 2007 is: Debit Unearned Fees $3,870; Credit Fees Earned $3,870, which matches the provided answer.

On March 31, 2007, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five different magazines. The subscriptions are starting immediately. What is the adjusting entry that should be recorded by Melanie Publishing Company on December 31, 2007?Single choice

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