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Chapter 3: Problem 8

The balance in the unearned fees account, before adjustment at the end of the year, is \(\$ 38,375\). Journalize the adjusting entry required if the amount of unearned fees at the end of the year is \(\$ 17,200\).

Short Answer

Expert verified
Adjust the unearned fees by debiting $21,175 to Unearned Fees and crediting $21,175 to Fees Earned.

Step by step solution

01

Understanding Unearned Fees

Unearned fees represent a liability on the balance sheet because they are fees received before services are rendered. As these services are provided, the unearned fees need to be adjusted to recognize the revenue.
02

Calculating Earned Fees

To determine the amount of fees that have been earned by the end of the year, subtract the unearned fees after adjustment from the balance before adjustment: \[\text{Earned Fees} = \text{Balance Before Adjustment} - \text{Unearned Fees After Adjustment}\]Substitute the given values: \[\text{Earned Fees} = \\(38,375 - \\)17,200 = \$21,175\]
03

Journalizing the Adjusting Entry

The adjusting entry involves reducing the unearned fees account and increasing the fees earned (or service revenue) account by the amount of earned fees. The journal entry will look like this:- Debit Unearned Fees: \\(21,175- Credit Fees Earned (or Service Revenue): \\)21,175This entry decreases the liability and recognizes the revenue for the services provided.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Unearned Fees
Unearned fees represent money received by a business before the service or product associated with this revenue is actually delivered. This usually happens when a customer pays in advance.
Since the business hasn't yet provided the service or product, it owes something back to the customer 鈥� whether it's delivering the service or refunding the money. This makes unearned fees a liability on the balance sheet.
By the end of a certain period, businesses need to adjust this account. If they have provided the service or delivered the product, they transition these fees from a liability to earned revenue. Not doing so can overstate liabilities and understate revenue, which could lead to inaccurate financial statements.
Journal Entry
A journal entry is an essential tool in accounting used to record transactions in the financial books of a company. Here's how it works for adjusting unearned fees:
  • Debiting Unearned Fees: This action decreases the liability on the balance sheet as the service owed to the client has now been rendered. Essentially, the debt to provide a service is partially or fully settled.
  • Crediting Fees Earned: This action increases revenue on the income statement. It acknowledges that the company has fulfilled its obligation and can now legitimately claim the revenue as earned.
In the example given, the adjustment involves debiting the unearned fees by \(21,175\) and crediting the same amount to fees earned, accurately reflecting the earned revenue in the company鈥檚 financial records.
Revenue Recognition
Revenue recognition is a crucial accounting principle dictating the precise moment when revenue should be recorded in the financial statements. It focusses on when services are delivered or products are sold.
In situations where fees are received before services are rendered, businesses cannot initially recognize these as revenue. Instead, they are recorded as unearned fees, constituting a liability.
Once the service has been provided or the product delivered, the business needs to recognize the revenue in its books. The adjustment accurately shifts the transaction from a liability to a realized revenue, ensuring faithful representation of the business's financial performance during the period.
This precise timing is vital because it affects the business鈥檚 listed income, impacting financial analysis and decisions.

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Most popular questions from this chapter

The prepaid insurance account had a balance of \(\$ 5,400\) at the beginning of the year. The account was debited for \(\$ 6,000\) for premiums on policies purchased during the year. Journalize the adjusting entry required at the end of the year for each of the following situations: (a) the amount of unexpired insurance applicable to future periods is \(\$ 1,000\); (b) the amount of insurance expired during the year is \(\$ 10,400\).

At the end of February, the first month of the business year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for February and (b) the balance sheet as of February 28. Also indicate whether the items in error will be overstated or understated.

The balance in the prepaid insurance account, before adjustment at the end of the year, is \(\$ 11,500\). Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (a) the amount of insurance expired during the year is \(\$ 8,750\); (b) the amount of unexpired insurance applicable to future periods is \(\$ 2,750\).

Canyon Realty Co. pays weekly salaries of \(\$ 3,700\) on Friday for a five-day workweek ending on that day. Journalize the necessary adjusting entry at the end of the accounting period assuming that the period ends (a) on Wednesday and (b) on Thursday.

At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for March and (b) the balance sheet as of March 31 ? Also indicate whether the items in error will be overstated or understated.
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