13Q - Intermediate Accounting (Kieso)

Question

The New York Knicks, Inc. sold 10,000 season tickets at $2,000 each. By December 31, 2017, 16 of the 40 home games had been played. What amount should be reported as a current liability at December 31, 2017?

Step-by-Step Solution

Answer

The business entity will report a current liability of $12,000,000.

Definition of Unearned Revenue

A current liability representing the obligation to provide service or product for which payment has been received in advance is unearned revenue.

Calculation of current liability

Calculation of total unearned revenue:

$\begin{array}{rcl}\mathrm{Total} \mathrm{unearned} \mathrm{revenue}& =& \mathrm{Total} \mathrm{tickets}\times \mathrm{Price} \mathrm{per} \mathrm{ticket}\\ & =& 10,000\times \$2,000\\ & =& \$20,000,000\end{array}$

Calculation of revenue earned for 16 games:

$\begin{array}{rcl}\mathrm{Revenue} \mathrm{earned} \mathrm{for} 16 \mathrm{games}& =& \frac{\mathrm{Total} \mathrm{unearned} \mathrm{revenue}}{\mathrm{Total} \mathrm{home} \mathrm{games}}\times 16\\ & =& \frac{\$20,000,000}{40}\times 16\\ & =& \$8,000,000\end{array}$

Calculation of unearned revenue:

Particular	Amount $
Total unearned revenue	$20,000,000
Less: Revenue earned for 16 games	(8,000,000)
Unearned revenue (current liability)	$12,000,000