Solution to

Problem 1-16

Unearned Revenues
Nature of Unearned Revenues

• Unearned revenues are cash received in advance for services to be

rendered at a future date.

• Until the related services are performed, no revenue shall be

recognized by the company, and thus, the company will recognize
a liability in the statement of financial position.
Illustrative case
• The Grant Publication sells magazine subscriptions for one to three-year
periods. Information relating to sales and expiration (or the performance of the
related service) are as follows:
2017 2018 2019 2020
Subscriptions sold P 5,000,000 P 4,500,000 P 5,500,000 P 7,000,000
Expiring in:
2017 P 1,000,000
2018 2,800,000 P 1,200,000
2019 1,200,000 2,000,000 P 1,800,000
2020 1,300,000 2,400,000 P 2,000,000
2021 1,300,000 2,800,000
2022 2,200,000
Illustrative case

REQUIRED:

a. What is the balance of the Unearned Subscriptions Revenue at January

1, 2019?

b. Prepare the journal entries to record the receipt of subscriptions and

revenue from magazine subscriptions for years 2019 and 2020.

c. What is the balance of the Unearned Subscriptions Revenue at

December 31, 2019 and at December 31, 2020.
Annex: Realization of revenue from subscriptions per year

2017 2018 2019 2020 Total revenues

each year
Subscriptions sold P 5,000,000 P 4,500,000 P 5,500,000 P 7,000,000
Expiring in:
2017 P 1,000,000 P 1,000,000
2018 2,800,000 P 1,200,000 4,000,000
2019 1,200,000 2,000,000 P 1,800,000 5,000,000
2020 1,300,000 2,400,000 P 2,000,000 5,700,000
2021 1,300,000 2,800,000 4,100,000
2022 2,200,000 2,200,000
Unearned revenues @ January 1, 2019
Expired (Realized) Not yet expired (Unearned)

2017 2018 Total revenues

each year
Subscriptions sold P 5,000,000 P 4,500,000
Expiring in:
2017 P 1,000,000 P 1,000,000
2018 2,800,000 P 1,200,000 4,000,000
2019 1,200,000 2,000,000 3,200,000
2020 1,300,000 1,300,000

Total Unearned Revenues from Magazine Subscriptions, Jan. 1, 2019 = P4,500,000

Journal entries for 2019

Cash P 5,500,000
Unearned revenue from
magazine subscriptions P 5,500,000
To record receipt of advance payment from subscribers.

Unearned revenue from

magazine subscriptions P 5,000,000
Revenue from magazine
subscriptions P 5,000,000
To record realized revenues from magazine subscriptions. (refer to Annex)
Financial statement presentation at December 31, 2019

UNEARNED REVENUE FROM MAGAZINE SUBSCRIPTIONS

Balance at beginning of year P 4,500,000

Subscriptions received during the year 5,500,000
Subscriptions earned during the year ( 5,000,000)
Balance at end of year P 5,000,000
Unrealized revenues @ December 31, 2019 – Alternative computation

Expired (Realized) Not yet expired (Unearned)

2017 2018 2019 Total revenues

each year
Subscriptions sold P 5,000,000 P 4,500,000 P 5,500,000
Expiring in:
2017 P 1,000,000 P 1,000,000
2018 2,800,000 P 1,200,000 4,000,000
2019 1,200,000 2,000,000 P 1,800,000 5,000,000
2020 1,300,000 2,400,000 3,700,000
2021 1,300,000 1,300,000

Total Unearned Revenues from Magazine Subscriptions, Dec. 31, 2019 = P5,000,000
Journal entries for 2020

Cash P 7,000,000
Unearned revenue from
magazine subscriptions P 7,000,000
To record receipt of advance payment from subscribers.

Unearned revenue from

magazine subscriptions P 5,700,000
Revenue from magazine
subscriptions P 5,700,000
To record realized revenues from magazine subscriptions. (refer to Annex)
Financial statement presentation at December 31, 2020

UNEARNED REVENUE FROM MAGAZINE SUBSCRIPTIONS

Balance at beginning of year P 5,000,000

Subscriptions received during the year 7,000,000
Subscriptions earned during the year ( 5,700,000)
Balance at end of year P 6,300,000
Unrealized revenues @ December 31, 2020 – Alternative computation

Expired (Realized) Not yet expired (Unearned)

2017 2018 2019 2020 Total revenues

each year
Subscriptions sold P 5,000,000 P 4,500,000 P 5,500,000 P 7,000,000
Expiring in:
2017 P 1,000,000 P 1,000,000
2018 2,800,000 P 1,200,000 4,000,000
2019 1,200,000 2,000,000 P 1,800,000 5,000,000
2020 1,300,000 2,400,000 P 2,000,000 5,700,000
2021 1,300,000 2,800,000 4,100,000
2022 2,200,000 2,200,000

Total Unearned Revenues from Magazine Subscriptions, Dec. 31, 2020 = P6,300,000
T-account analysis for unearned revenue

UNEARNED REVENUE FROM MAGAZINE SUBSCRIPTIONS

Subscriptions earned/realized Beginning balance P xx

during the year xx
Subscriptions received
during the year xx

Ending balance P xx • Usually, unearned revenues arise from the

performance of services, that are normally
provided by the company. Therefore, since
it is realized within the normal operating
cycle of the company, it is presented as a
CURRENT LIABILITY.