USA Accruing to Prepaid ??


Joined
May 10, 2016
Messages
1
Reaction score
0
Country
United States
Hello,

I work in the accounting department for a large corporation. We received a 500k subscription invoice in March covering an entire year(Jan-Dec) and signed a contract for the services in Feb. The services run for a 12 month period. We did not pay the invoice until April 2016.

We used their services for January, February, March, and April and will continue to use their services throughout the year. What is the proper accounting treatment after signing the contract in February? Do we accrue the entire amount(500k) of the contract at the time of contract signing? Credit accrued payables for 500k and debit prepaid(or some other current asset account) for 420k(500-40*2) ? Or do we only accrue Jan and Feb even though we signed a contract?
I'm torn on this issue because I thought grossing up the balance sheet should be avoided but I understand that we also want to record the liability... Is there any literature on the issue?

Thanks for your help and let me know if you need more information.

Thanks,
Ryan
 
Ad

Advertisements

Joined
Feb 10, 2015
Messages
10
Reaction score
0
Country
United States
I believe the correct journal entries would be as follows (assuming the annual expense is $540 to make the math divide evenly...adjust for your numbers):

In January: no entries (no contract signed yet).

In February:

Subscription Expense $90
Prepaid Subscriptions $450
Accounts Payable $540
to record the subscription contract

In March:

Subscription Expense $45
Prepaid Subscriptions $45
to record monthly subscription expense

In April:

Subscription Expense $45
Prepaid Subscriptions $45
to record monthly subscription expense
and
Accounts Payable $540
Cash $540
to record payment of the annual subscription contract

In May and following months until subscription expires:

Subscription Expense $45
Prepaid Subscriptions $45
to record monthly subscription expense

Nothing is recorded until the contract is signed. Once signed (and assuming you begin receiving benefits in January), reflect the liability and the benefits received so far, as well as the expense for the months of service received so far. Each following month, recognize the month's expense and reduce the prepaid account. When paid, close out the payable with the cash payment.

Hope that helps.

Dan
Jacksonville, Florida
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

Prepaid and Accrued Expense 3
USA Prepaid Expenses 5
UK Accrued and deferred income 3
USA Printer Maintenence - Prepaid or Accrued Expense? 1
USA Prepaid Expenses . R&D Projects ... 0
UK How do I accrue for Dilapidations? 0
USA Prepaid 1
USA Accrued revenues 7

Top