Question

Problem 3 Early in 2020, after the 2019 financial statements had been issued, a company found that an advanced payment of $180,000 received on September 1, 2018 for services to be performed monthly for 3 years beginning September 1, 2018 was inadvertently recorded as revenue. Prepare the entry to record a prior period adjustment for this error.

Answer 1

On September 1, 2018 service revenue of $180,000 was received in advance for 3 years.

Hence, service revenue earned up to December 31, 2019 = 180,000 x 16/36

= $80,000

Unearned service revenue on January 1, 2020 = Total service revenue - service revenue earned up to December 31, 2019

= 180,000-80,000

= $100,000

The whole of $180,000 had been recorded as income although revenue earned up to December 31, 2019 is 180,000 only. Hence, remaining $100,000 represents unearned service revenue and being a liability, it should be credited. Since $100,000 of revenue has not been earned so far, hence retained earnings mus now be debited by $100,000.

Since the whole amount of $180,000 was recorded as revenue, the following prior period adjustment entry is needed to correct this error:

Date	General Journal	Debit	Credit
January 1, 2020	Retained earnings	$100,000
	Unearned service revenue		$100,000
	( To record unearned service revenue)

Kindly comment if you need further assistance.

Thanks