Chapter 4, Problem 4.11E

Subscriptions

Horse Country Living publishes a monthly magazine for which a 12-month subscription costs $30. All subscriptions require payment of the full $30 in advance. On August 1, the balance in the Subscriptions Received in Advance account was $40,500. During the month of August, the company sold 900 yearly subscriptions. After the adjusting entry at the end of August, the balance in the Subscriptions Received in Advance account is $60,000.

Required

1. Prepare the journal entry to record the sale of the 900 yearly subscriptions during the month of August.
2. Prepare the adjusting journal entry on August 31.
3. Assume that the accountant made the correct entry during August to record the sale of the 900 subscriptions but forgot to make the adjusting entry on August 31. Would net income for August be overstated or understated? Explain your answer.