Question

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MC1q4 discussion, 1 point, due 2/3 Refer to Chapter / multiple-choice question 4 below. (4) According to the FASB's conceptual framework, an entity's revenue may result from a(n) A. Decrease in an asset from primary operations. B. Increase in an asset from incidental transactions. C. Increase in a liability from incidental transactions. D. Decrease in a liability from primary operations. The correct answer is D. A. A decrease in an asset from primary operations results in an expense. B. An increase in an asset from incidental transactions results in a gain. C. An increase in a liability from incidental transactions results in a loss D. Revenues are inflows or other enhancements of assets or settlements of liabilities from activities that constitute the entity's ongoing major or central operations. Thus, a revenue may result from a decrease in a liability from primary operations, for example, by delivering goods that were paid for in advance. 1. Please give an example of how an entity's revenue may result from a decrease in liability from primary operations. 2. Please provide the journal entry based on the example you described. Hint: it is an adjusting entry.

Answer 1

Question 1: Form Example ABC Co. is in business of letting out Office spaces. ABC Co. charges Rental of $1,000 per month from it’s Customer Mr.X. ABC Co. collects rent of each quarter at the beginning of the quarter and issues Invoice for rent at the end of each month.

As a result on 1^st April ABC Co. receives Cash Payment of $3,000 as an advance for rent of April-June quarter from Mr X. This will be Unearned Revenue (Current Liability) for ABC Co. as on April 1. It is going to be recognized as revenue over period of 3 months. Hence on 30^th April when Invoice will be raised, ABC Co. will reduce it’s Unearned Revenue by $1,000 and Increase Rental Revenue (for Income Statement) by $1,000. Same would be repeated for 31^st May and 30^th June as well.

Question 2: Journal Entry for above stated example would be as follows:

Date	Particulars	Debit	Credit
April 1	Cash	$3,000
	Unearned Revenue (Current Liability)		$3,000
	(Received Rent Payment for Quarter at beginning of quarter.)
April 30	Unearned Revenue (Current Liability)	$1,000
	Rental Revenue		$1,000
	(Rental Income of April recognized against rent received in advance.)