You work in a company that has begun selling pre-orders for its new online magazine annual subscription.
Question:
You work in a company that has begun selling pre-orders for its new online magazine annual subscription. In November 2021, the company sold the first pre-order subscriptions, receiving $600,000, which represents one-fifth of its revenues from all sources for the year. The entire amount was collected in cash. The 12-month subscriptions will be distributed monthly starting in December 2021. As the end of the year approaches, you notice that the company had recorded the following journal entry:
Date | Account | Debit | Credit |
Nov 2021 | Cash | 600,000 | |
Subscription Revenue | 600,000 |
There is no plan to make an adjusting entry at year-end. You quickly realize that something is wrong!
Task:
Draft a memo to your supervisor that answers the following questions:
1) What is the accounting error that was made? What accounting principle(s) have been violated?
2) If left uncorrected, what are the effects that this error will have on the financial statements dated December 31, 2021? (Be specific!)
3) If left uncorrected, what are some other problems that might occur?
4) The importance of fixing the error and what needs to be done to fix the error (include your recommended journal entry or entries)
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe