On April 1,Otisco,Inc.paid Garcia Publishing Company $1,548 for 36-month subscriptions to several different magazines.Otisco debited the prepayment to a Prepaid Subscriptions account,and the subscriptions started immediately.What adjusting entry should be made by Otisco,Inc.for the adjustment on December 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustments had been made?

Question

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As Otisco paid for a 36-month subscription on April 1, one-third of the subscription would have been used up by December 31 (8 months). Therefore, the adjusting entry should reduce the Prepaid Subscriptions account by the amount used up (1,548/36*8 = $344) and recognize that amount as Subscription Expense. The entry would be to debit Subscription Expense $344 and credit Prepaid Subscriptions $344. However, since none of the answer choices reflect this exact amount, the closest choice is E, which debits/credits $387, a reasonable estimate of the amount used up.