Problem 1 - Accounting

Question

Rock On Magazine Co. sold 11,400 annual subscriptions of Rock On for \(\$ 35\) during December 2008. These new subscribers will receive monthly issues, beginning in January 2009. In addition, the business had taxable income of \(\$ 140,000\) during the first calendar quarter of 2009 . The federal tax rate is \(35 \%\). A quarterly tax payment will be made on April 7,2009 . Prepare the Current Liabilities section of the balance sheet for Rock On Magazine Co. on March 31,2009 .

Step-by-Step Solution

Answer

The current liabilities as of March 31, 2009, include unearned revenue of \( \$299,250 \) and tax payable of \( \$49,000 \), totaling \( \$348,250 \).

Step 1: Calculate Revenue from Subscriptions

Rock On Magazine Co. sold 11,400 subscriptions at $35 each in December 2008. Calculate the total revenue from these subscriptions: \ \( 11,400 \times 35 = 399,000 \). This amount will be recognized as unearned revenue as of March 31, 2009 since the magazines are yet to be delivered for the remaining months of the subscriptions.

Step 2: Determine Twelve-Month Subscription Revenue

Each subscription is an annual one, covering 12 months. Since the revenue is recognized over a year, calculate the portion of the subscription to be attributed to the financial year up to March 31, 2009.

Step 3: Calculate Unearned Revenue as of March 31, 2009

By the end of March, three out of the twelve issues have been delivered. This means 25% of the revenue has been earned by March 31. The remaining 75% is unearned. Calculate the unearned portion: \ \( 399,000 \times 0.75 = 299,250 \). This is the amount that will be recorded as a liability for unearned subscription revenue.

Step 4: Calculate Quarterly Tax Payment

The taxable income for the first quarter of 2009 is $140,000. Calculate the tax owed using a tax rate of 35%: \ \( 140,000 \times 0.35 = 49,000 \). This amount represents the current income tax payable, which is a part of current liabilities.

Step 5: Prepare the Current Liabilities Section

Compile the information into the Current Liabilities section of the balance sheet as of March 31, 2009. The section includes: - Unearned Subscription Revenue: \( \\(299,250 \)- Income Tax Payable: \( \\)49,000 \)Current Liabilities totals to \( \$348,250 \).

Key Concepts

Unearned Revenue

Unearned revenue is a financial term that describes money received by a company for goods or services that have not yet been delivered or performed. Think of it as a promise where the customer pays upfront, and the company is responsible for delivering at a future date. In the context of Rock On Magazine Co., when they sold 11,400 annual subscriptions for $35 each, they effectively collected $399,000 before delivering the magazines. This amount was collected in December 2008, but the magazines were to be sent monthly, starting in January 2009.

Now, as of March 31, 2009, three issues have been sent out, meaning one-quarter of the service has been delivered. Thus, 25% of the total subscription price has been recognized as earned revenue. The remaining 75%, which amounts to $299,250, is still a commitment to deliver future magazines, and so it remains labeled as unearned revenue. This liability will reduce over time as more issues are delivered. It is crucial to understand that unearned revenue appears on the balance sheet under current liabilities because it represents an obligation the company still owes to its customers. This ensures that financial statements accurately reflect the company's financial situation by matching revenues with the corresponding period when the service is provided.

Income Tax Payable

Income tax payable refers to the amount of money a company is liable to pay the government based on its taxable income. It is an obligation a company incurs when it generates profit. For Rock On Magazine Co., their taxable income for the first quarter of 2009 was $140,000. With a federal tax rate of 35%, they have calculated their tax payable to be $49,000.

This amount is treated as a current liability since they must settle this obligation shortly, typically within the fiscal quarter or as dictated by tax legislation. Managed properly, income tax payable ensures that a business aligns itself with governmental requirements while remaining organized in its financial affairs. Moreover, properly accounting for taxes payable is essential for preparing other fiscal documents like the income statement and cash flow statement, providing a complete picture of the company's financial health. This recognized tax amount of $49,000 provides clarity about obligations, assisting in maintaining legal compliance and avoiding potential fines or discrepancies from incorrect reporting.

Balance Sheet Preparation

A balance sheet offers a snapshot of a company's financial position at a specific point in time, presenting an overview of its assets, liabilities, and equity. Preparing the balance sheet, especially the current liabilities section, helps in understanding short-term obligations the company needs to fulfill.

Incorporating the concepts of unearned revenue and income tax payable, Rock On Magazine Co.'s current liabilities section as of March 31, 2009, includes $299,250 in unearned subscription revenue and $49,000 in income tax payable. Together, these liabilities total $348,250. Current liabilities are debts or obligations that are due within one year. This ensures businesses can accurately assess cash flow needs and liquidity by outlining what needs to be paid shortly.

The balance sheet assists in further strategic planning and management decision-making. It reassures investors and creditors about the company’s financial stability and capacity to meet immediate obligations, which in turn helps in building trust and forming potential financial strategies in line with long-term objectives. Using meticulous accounting practices in balance sheet preparation is vital in reflecting an organization’s true financial health.