Chapter 7, Problem 7.26P

Problem 7.26

LO 3

Unearned revenues-subscription fees Evans Ltd. publishes a monthly newsletter for retail marketing managers and requires its subscribers to pay $90 in advance for a one-year subscription. During the month of August 2016, Evans Ltd. sold 400 one-year subscriptions and received payments in advance from all new subscribers. Only 240 of the new subscribers paid their fees in time to receive the August newsletter; the other subscriptions began with the September newsletter.

Required:

1. Use the horizontal model (or write the journal entries) to record the effects of the following items:
1. Subscription fees received in advance during August 2016.
2. Subscription revenue earned during August 2016.
2. Calculate the amount of subscription revenue earned by Evans Ltd. during the year ended December 31, 2016, for these 400 subscriptions.
Optional continuation of Problem 7.26-lifetime subscription offer (Note: This is an analytical assignment involving the use of present value tables and accounting estimates. Only the first sentence in Problem 7.26 applies to this continuation of the problem.) 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 $1,200. The one-year subscription rate of $90 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 10%.

Using the information given, determine whether it would be profitable for Evans Ltd. to sell lifetime subscriptions. (Hint: Calculate the present value of a lifetime membership for an average subscriber using the appropriate table in Chapter 6.)

What additional factors should Evans Ltd. consider in determining whether to offer a lifetime membership option? Explain your answer as specifically as possible.