On april 1, santa fe, inc. paid griffith publishing company $2,448 for 36-month subscriptions to several different magazines. santa fe debited the prepayment to a prepaid subscriptions account, and the subscriptions started immediately. what amount should appear in the prepaid subscription account for santa fe, inc. after adjustments on december 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustment has been made?
Explanation: Santa fe, inc. Paid Griffith publishing company $1,548 for 36-month subscriptions to several different magazines. Since Santa fe, Inc subscription started at the same moment and the books of accounts shows fiscal year ended 31st December.
Prepaid expenses per month = Subscription amount ÷ Number of months
Prepaid expenses per month = $1548 ÷ 36
Prepaid expenses per month = $43
Since the subscription started immediately in the month of April, for the current year (April - December) 9 months ,
The subscription amount is $43 × 9 = $387
Prepaid subscription carried forward = $1548 - $387
Prepaid subscription carried forward = $1161
$2,511 should appear in the Prepaid Subscription account for Santa Fe, Inc. after adjustments on December 31.
Prepayment is the payment in advance against an expense which is not accrued yet. The prepayment is an asset because you didn't get your product of service and payment made in advance the action is pending on cash receiving party.
Total Prepaid subscription = $3,348
Number of months = 36 months
Number of Months spend until December 31 = 9 months
Prepaid Expense adjusted = $3,348 x 9/36 = $837
Prepaid subscription after adjustment = $3,348 - $837 = $2,511
The amount of prepaid subscription in Santa,Fe's account is $1701
By the end of the year, that is 31st December of the first year,Griffith would have delivered 9 months magazines to Santa Fe,Inc, which implies that the number of months whose magazines have not been made available is 27 months (36 months minus 9 months).
In addition, the amount of prepaid subscription at the end of the year is calculated below:
Subscription prepaid balance =27/36*$2,268
This means that the magazine expense for the current year is $567($2268 minus $1701)