Evans Ltd. publishes a monthly newsletter for retail marketing managers and requires its subscribers to pay $50 in advance for a one-year subscription. During the month of September 2010, Evans Ltd. sold 200 one-year subscriptions and received payments in advance from all new subscribers. Only 120 of the new subscribers paid their fees in time to receive the September newsletter; the other subscriptions began with the October newsletter.
a. Use the horizontal model (or write the journal entries) to record the effects of the following items:
1. Subscription fees received in advance during September 2010.
2. Subscription revenue earned during September 2010.
b. Calculate the amount of subscription revenue earned by Evans Ltd. during the year ended December 31, 2010, for these 200 subscriptions.
Evans Ltd. is now considering the possibility of offering a lifetime membership option to its subscribers. Under this proposal, subscribers could receive the monthly newsletter throughout their lives by paying a flat fee of $600. The one-year subscription rate of $50 would continue to apply to new and existing subscribers who choose to subscribe on an annual basis. Assume that the average age of Evans Ltd.’s current subscribers is 38, and their average life expectancy is 78 years. Evans Ltd.’s average interest rate on long-term debt is 12%.
c. Using the information given, determine whether it would be profitable for Evans Ltd. to sell lifetime subscriptions.
d. What additional factors should Evans Ltd. consider in determining whether to offer a lifetime membership option? Explain your answer as specifically as possible.