Question

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 $10,100 cash in advance for four months of evenly planned legal services beginning on October 1. Tao records it by debiting Cash and crediting Unearned Revenue both for $10,100. 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? Unearned revenue 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.

Answer 1

a)

Step 1 = Current Balance = $10,100

Step 2 = Balance that should be = $2,525

Step 3 Journal entry:

Debit.....Unearned Revenues.....$7,575

Credit....Service Revenue........$7,575

b)

Step 1 = Current Balance = $2,700

Step 2 = Balance that should be = $1,350

Step 3 Journal entry:

Debit.....Unearned Revenues.....$1,3750

Credit....Subscription Revenue........$1,350

Workings

a) Balance in unearned revenue = $10,100 (money which was received on Oct 1)

The balance was provided for 4 months of service. Hence revenue to be recognised per month = 10100/4 = $2,525

No. of months for which work was performed during the year = Oct 1 to Dec 31 = 3 months

Revenue to be booked and unearned revenue to be reduced = 2525*3 = $7,575

b) Balance in unearned revenue = $27*100 = $2,700 (money which was received on Jul 1)

The money was provided for 12 months of subscription. Hence revenue to be recognised per month = 2700/12 = $225

No. of months for which work was performed during the year = Jul 1 to Dec 31 = 6 months

Revenue to be booked and unearned revenue to be reduced = 225*6 = $1,350

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