Q17SE_2 - Horngren'S Financial And Managerial Accounting

Question

On September 1, 2018, Salem Landscaping collected $24,000 in advance from customers for landscaping services. The service revenue will be earned monthly over the 12-month period ending August 31, 2019. Requirements 1. Journalize the entry on September 1 by using the alternative treatment of deferred revenues. 2. Record the December 31, 2018 adjusting entry

Step-by-Step Solution

Answer

Date	Account and Explanation	Debit	Credit
31-12-2018	Service Revenue	$16,000
	Unearned Revenue		$16,000
	To record unearned revenue

Step-by-Step Solution Step 1: Explanation of Entry

On December 31, 2018, adjusting entry for unearned revenue will be recorded by debiting service revenue and crediting unearned revenue by $16,000, respectively, to record unearned revenue. 

Step 2: Calculation of Revenue Earned

Revenue earned is calculated as follows: 

$\begin{array}{c}\mathbf{RevenueEarned}\mathbf{=}\mathbf{AmountReceived}\mathbf{\times }\frac{\mathrm{NumberofMonthsExpired}}{\mathrm{MonthsPerYear}}\\ \mathbf{=}\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{4}{12}\\ =\$8,000\end{array}$

Step 3: Calculation of Unearned Revenue

Unearned revenue is calculated as follows:

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{Unearned}\mathbf{Revenue}\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{AmountReceived}-\mathbf{RevenueEarned}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{000}\\ =\$16,000\end{array}$