Subscription And Customer Base Leading To Inflow of Money

UCLA-NUS Name___________________
August 2019
MGMT 403: Financial Accounting
Quiz 1
Please refer to the financial statements of Sirius XM Holdings Inc. for 2016 in answering the following
questions. Show all computations in the space provided.
I. Balance Sheet (all dollar amounts in millions)
1. a. What is the total amount owed to Sirius by its
customers as of December 31, 2018? (3 points)
b. Suppose that in November 2018 Sirius sold $10
of its services to a car dealership on credit. Please
indicate the accounts and financial statements that
would have been affected by this transaction.
(You can show the journal entry if you’d like.) (3 points)
c. Suppose that in January 2019, Sirius collected
$4 of the amount sold in November 2018 (referred
to in b). How would this transaction affect the
items shown on the right for 2019? (3 points)
1. a. The total amount owed to Sirius by its customers
as of December 2018 is indicated in the balance sheet
as accounts receivable plus the allowance for doubtful
debt that the company made.
Thus, total amount owed = $233 million + $6.6
million = $239.60 million.
b. Accounts Financial Statements
Accounts Receivable Balance Sheet
Service Revenue Income Statement
The Journal entry for the same would be:
Accounts Receivable ----- Dr. $10
Service Revenue $10
c. Circle the correct response
(1) Revenues increase / decrease / no effect
(2) Accounts Receivable increase / decrease / no effect
(3) Current Ratio increase / decrease / no effect
2. a. What are the company’s two primary assets?
(2 points)
What percentage of total assets do they
collectively represent? (2 points)
b. How would investors likely view the company
because of the nature of these assets? (Discuss
both the positive and negative aspects.)
(3 points)
2.a. The two primary assets of the company are:
i. Intangible assets: $2,510.40
ii. Goodwill: $2,290
The percentage of these two collectively on total assets is
computed as: (2,510.40 + 2,290) / 8,172.70 = 4,800.40 /
8,172.70 = 58.74%
b. Positive: The investors would understand that the
company has good market reputation and created
goodwill for itself in the market. The market believes
in the potential of the company.
Negative: The investors would see that the company
do not have strong physical asset base which is an
indication of poor operating performance.

2
3. a. Is the company liquid as of December 31,
2018? Explain. (3 points)
b. Considering the type of business that Sirius
is in (see its business model as summarized on
page 1 of the financial statements), why might
it not need to be as liquid (as indicated by
Balance Sheet measures) as some other types
of companies? (2 points)
3. a. To estimate the liquidity of the company, we would
compute its current ratio. The current ratio = Current
Assets / Current Liabilities = 478.2 / 2,802.70 = 0.17
times.
This is a very low current ratio and indicates that the
company is facing a liquidity crunch where it does not
have adequate current assets to discharge off its current
liabilities in time.
b. Sirius might not be that liquid as others as the
company works on a prepaid subscription model which
increases its current liability thereby reducing the
current ration and affecting the liquidity of the company.
4. a. Sirius reports a noncurrent asset,
Deferred charges - product development of
$292.7, as of December 31, 2018. What is the
justification for capitalizing these costs?
(2 points)
b. If the company’s management had decided
not to capitalize any of these costs and instead
recognized them as an expense when they
were incurred, how would the items to the
right have changed? (3 points)
4. a. The charges for product development, which has
been paid by the company, is capitalized as it is a form
of prepaid expenses and is an asset for the company.
The company has made cash payment for a service of
product that has not yet been received by it, thus this
payment is capitalized as an asset.
b. Circle the correct response
(1) Retained Earnings would have been:
higher / lower / the same
(2) Cash Flow from Investing Activities:
higher / lower / the same
(3) Prepaid Expenses would have been:
higher / lower / the same
5. Suppose that in early January 2019, the
company’s management discovers that the
Prepaid Expenses balance was overstated by
$20 because its accountants neglected to
record a rental expense for the month of
December 2018. How would this mistake
(before the correction) affect the items shown
on the right as of December 2018? (3 points)
5. Circle the correct response
After the correction:
(1) Net income would be:
higher / lower / the same
(2) The Cash balance would be:
higher / lower / the same
(3) Total Liabilities/Total Equity would be:
higher / lower / the same
6. a. Sirius reports Deferred Revenue in both
its current and long-term liabilities in the
amounts of $1931.6 and $149.0, respectively,
on December 31, 2018. What type of
transaction(s) gave rise to these amounts?
(3 points)
b. Why is Deferred Revenue a “nonmonetary”
liability? (2 points)
c. Suppose that the current portion of the
deferred revenue has a balance of $1,321.6
on January 31, 2019 as a result of only one
transaction. What was the nature of this
transaction? (3 points)
6. a. Transactions that involve collection of advance
payment from customers against services which have
not yet been rendered gives rise to Deferred revenue for
the firm. These are advance payments for services or
goods that have not yet been delivered or provided.
b. A deferred revenue involves collection of advance
payment for providing services in future. There is no
cash involved in providing services and thus it is a
nonmonetary liability. To satisfy its obligation, the
company should only perform the services promised
against which the payment has been received.
c. The current portion of the deferred revenue is towards
the prepaid subscription that has a service obligation of
less than one year i.e. annual or semi annual prepaid
subscription must have formed current portion of the
deferred revenue.
7. a. On December 31, 2018, Sirius reported
Accrued interest (within current liabilities)
7. a. This interest expense would form a part of the
income statement and must have been recorded as an

3