a On November 1, 2021, LA Services Company received $12,000 in advance of performing the services from a customer for next three months of service; November and December 2021 and January 2022. On November 1, 2021, LA Services Company recorded $12,000 as Unearned Revenue for this transaction. What would be the journal entry to adjust the accounts on December 31, 2021? Debit Unearned Revenue $12,000, and credit Service Revenue $12.000. Debit Service Revenue $4,000, and credit Unearned Revenue $4,000. Debit Service Revenue $4,000, and credit Accounts Receivable $4,000. Debit Unearned Revenue $8,000, and credit Service Revenue $8,000.
The Correct Answer and Explanation is :
The correct journal entry to adjust the accounts on December 31, 2021, is:
Debit Unearned Revenue $8,000
Credit Service Revenue $8,000
Explanation:
On November 1, 2021, LA Services Company received $12,000 in advance for services to be provided over three months: November, December, and January. This advance payment was initially recorded as Unearned Revenue, a liability account, reflecting the company’s obligation to deliver services in the future.
As the company performs the services, it earns the revenue, necessitating an adjustment to recognize the earned portion and reduce the liability.
Calculating Monthly Revenue:
- Total advance payment: $12,000
- Service period: 3 months (November, December, January)
- Monthly revenue earned: $12,000 ÷ 3 = $4,000
Revenue Earned by December 31, 2021:
By December 31, 2021, services for November and December have been completed.
- Revenue earned in November: $4,000
- Revenue earned in December: $4,000
- Total revenue earned by December 31, 2021: $4,000 + $4,000 = $8,000
Adjusting Entry on December 31, 2021:
To reflect the earned revenue and reduce the unearned revenue liability, the following adjusting entry is made:
- Debit Unearned Revenue $8,000: This decreases the liability, acknowledging that $8,000 of the previously unearned revenue has now been earned.
- Credit Service Revenue $8,000: This increases the revenue account, recognizing the income earned from services provided in November and December.
This adjustment ensures that the financial statements accurately represent the company’s financial position as of December 31, 2021, by:
- Reducing the Unearned Revenue liability to reflect only the amount related to services yet to be performed (i.e., $4,000 for January).
- Recognizing Service Revenue for the services already rendered, aligning with the accrual basis of accounting, which records revenues when earned, regardless of when cash is received.
By making this adjusting entry, LA Services Company ensures compliance with accounting principles, providing stakeholders with an accurate depiction of earned revenues and remaining obligations.