- a company performs $10,000 of service and issues an invoice to the customer. using the accrual method, what’s the correct entry to record the transaction?
- Which of the following is an equity security?
Multiple Choice
U.S. Treasury bonds
Corporate notes
Corporate bonds
Municipal bonds
Company common stock
The Correct Answer and Explanation is :
- Accrual Method Entry for Service Performed:
Under the accrual method, revenue is recognized when it is earned, not when cash is received. Therefore, for the service provided, the company would record the following journal entry:
- Debit Accounts Receivable $10,000 (to reflect the amount owed by the customer for the service rendered).
- Credit Service Revenue $10,000 (to recognize the revenue earned from providing the service).
This entry ensures that revenue is properly recognized on the income statement in the period in which the service was performed, and the Accounts Receivable reflects the company’s claim for the payment to be received.
- Equity Security:
The correct answer is Company common stock.
Explanation:
Equity securities represent ownership interests in a company. They provide the shareholder with a claim on part of the company’s assets and earnings. These securities may be in the form of common stock or preferred stock. Let’s analyze each option:
- U.S. Treasury Bonds: These are debt securities issued by the U.S. government to raise funds. They represent a loan to the government and do not confer ownership in the government. Hence, they are not equity securities.
- Corporate Notes: Like U.S. Treasury bonds, these are debt instruments issued by corporations. Corporate notes are essentially loans made by investors to corporations. Again, these do not represent ownership in the company and are classified as debt, not equity.
- Corporate Bonds: These are also debt securities issued by corporations. Bondholders are creditors of the corporation, not owners, meaning they are not equity securities.
- Municipal Bonds: These are debt securities issued by local government entities like cities or states. Similar to the U.S. Treasury bonds, they represent a loan to the government entity, not ownership, and thus are not equity securities.
- Company Common Stock: This represents ownership in a company. Common stockholders are owners of the company and have rights to vote on corporate matters and to receive dividends if declared. This is the correct example of an equity security.
Therefore, company common stock is the only option that qualifies as an equity security because it represents a share in the ownership of the company.
I will now generate an image for this.
Here’s a visual representation of the accrual accounting journal entry for the service transaction. It illustrates the debit to Accounts Receivable and credit to Service Revenue. Let me know if you’d like any adjustments!
