Question

QS 3-11 Adjusting for unearned (deferred) revenues LO P2 For each separate case below, follow the three step process for adjusting the unearned revenue liability account at December 31. Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Assume no other adjusting entries are made during the year. a. Tao Co receives $10,000 cash in advance for four months of evenly planned legal services beginning on October 1Tao records it by debiting Cash and crediting Unearned Revenue both for $10,000. It is now December 31, and Tao has provided legal services as planned. What adjusting entry should Tao make to account for the work performed from October 1 through December 31? Debitor Credit? 10,000 Credit Unearned revenue 10,000 $ Step 1: Determine what the current account balance equals Step 2. Determine what the current account balance should equal Step 3 Record the December 31 adjusting entry to get from step 1 to step 2. b. Caden started a new publication called Contest News. Its subscribers pay $24 to receive 12 monthly issues with every < Prev 4 of 16 Next >

Answer 1

a.

Step 1: Unearned revenue $10,000 Credit

Step 2: Unearned revenue $2,500 Credit

Step 3: Adjusting entry   Debit Credit

Unearned revenue $7,500

Service fee earned $7,500

Note:

Service period - 4 months

As of Dec 31, only 3 months has been passed so revenue to be recognized equals 3/4th of $10,000

b.

Step 1: Unearned subscription revenue $2,400 Credit

Step 2: Unearned subscription revenue $1,200 Credit

Step 3: Adjusting entry   Debit Credit

Unearned subscription revenue $1,200

Subscription revenue    $1,200

Note:

Service period - 12 months

As of Dec 31, only 6 months has been passed so revenue to be recognized equals $24 x 100 x 6/12