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Chapter 3: 32E_1 (page 169)

Question :At the beginning of the year, Modish Advertising owed customers \(2,100 for unearned revenue collected in advance. During the year, Modish received advance cash receipts of \)6,100 and earned \(20,000 of service revenue (exclusive of any amount earned from advance payments). At year-end, the liability for unearned revenue is \)3,100 and unadjusted service revenue is $20,000. Requirements 1. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a liability account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance and additional unearned revenue in the Unearned Revenue T-account. 2. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a revenue account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance in the Unearned Revenue T-account and the additional unearned revenue in the Service Revenue T-account. 3. Compare the ending balances of the T-accounts under both approaches. Are they the same?

Short Answer

Expert verified

Adjusting entries are as follows:

Date

Accounts and Explanation

Debit

Credit

Unearned revenue

$5,100

Service revenue

$5,100

To record service revenue earned that was collected in advance

T accounts are as follows:

Unearned Revenue

$5,100

$2,100

$6,100

$3,100

Bal.

Service Revenue

$20,000

$5,100

$25,100

Bal.

Step by step solution

01

Step-by-Step-SolutionStep1: Explanation on Adjusting Entry

At the end year, adjusting entry for earned revenue will be recorded by unearned revenue and crediting service revenue by $5,100 respectively.

02

Calculation of Revenue Earned from Advance

Revenue earned from advance is calculated as follows:

RevenueEarned=BeginningBalance+CashReceipts-EndingBalance=$2,100+$6,100-$3,100=$5,100

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