Journal Entries for an Up Front, Refundable Fee
Accoun Tutor Company operates a nationwide online tutorial service for college students taking intermediate financial accounting. Subscribers to the service pay an up front, refundable fee of $200 that allows them access to the company’s services for one year. A subscriber may receive a full refund of this fee at any time during the year. Because the subscribers are accounting students with high ethics, Accoun Tutor has no concern about unscrupulous students using the service for a year and then brazenly asking for a full refund. The initial setup cost (incurred in cash) associated with each subscriber is $40.The direct cost to service a subscriber’s account for a year is $80; these costs are incurred in cash evenly throughout the year. The company can reliably estimate that 20% of subscribers will ask for a full refund of their subscription fee. On January 1, 2008, the company received payments from 20,000 subscribers. No refunds were requested until the end of the fourth quarter of the year when 3,800 subscribers requested and received full refunds. Costs associated with the subscribers who are expected to request refunds are expensed as incurred. Other direct costs are deferred and matched with the associated revenues. Make all summary journal entries necessary:
1. On January 1, 2008.
2. At the end of the first quarter.
3. At the end of the second quarter.
4. At the end of the third quarter.
5. At the end of the fourth quarter.