Question

On September 1, Year 1, Gomez Company collected $12,600 in advance from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would the company report as net cash flows from operating activities for Year 1?

		$12,600; $12,600
		$4200; $4200
		$0; $12,600
		$4200; $12,600

Answer 1

	On September 1, Year 1, Gomez Company collected $12,600 in advance from a customer for services to be provided over a one-year period beginning on that date, then entry passed would have been as follows:-
	Date	Particulars		Debit	Credit
	Sep 1	Cash	Dr.	$12,600
		Unearned Service Revenue			$12,600
		(To record cash received in advance)
	Th contract period is 1 year from September 1, Year 1 to August 31, Year 2 i.e. 12 months. $12600 paid in advance on September 1, Year1. Upto December 31, Year1, service would have been rendered for 4 months, so we recognize revenue for 4 months since it has been earned.
	Adjusting entry:-
	Date	Particulars		Debit	Credit
		Unearned Service Revenue (12600*4/12)	Dr.	$4,200
		Service Revenue			$4,200
		(To record recognition of revenue earned)
	How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1?
Ans	$4,200
	How much would the company report as net cash flows from operating activities for Year 1?
Ans	$12,600
	$4200; $12,600	This option is correct

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank you.