Adjusting Entries: Unearned Revenue quiz #1 Flashcards
Adjusting Entries: Unearned Revenue quiz #1
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What is unearned revenue and how is it classified on the balance sheet?
Unearned revenue is cash received before services are performed and is classified as a liability on the balance sheet because the company owes services to the customer. What is the initial journal entry when cash is received in advance for services not yet performed?
The initial entry is to debit Cash and credit Unearned Revenue, recognizing the liability to perform future services. Why is unearned revenue considered a liability?
Unearned revenue is a liability because the company has an obligation to provide goods or services in the future for which it has already received payment. How is unearned revenue adjusted as services are performed?
As services are performed, an adjusting entry is made to debit Unearned Revenue and credit Revenue, transferring the earned portion from liability to income. Given $1,000 received for 20 hours of tutoring, how much revenue is earned after 12 hours are completed?
After 12 hours, $600 is earned (12 hours × $50 per hour), and this amount is transferred from unearned revenue to earned revenue. What is the adjusting journal entry after 12 hours of tutoring have been provided out of 20 prepaid hours?
Debit Unearned Revenue $600 and credit Revenue $600 to reflect the amount earned. After the adjusting entry for 12 hours of tutoring, what is the remaining balance in unearned revenue?
The remaining balance in unearned revenue is $400, representing 8 hours of tutoring still owed. How does revenue recognition differ between the cash basis and accrual basis of accounting for unearned revenue?
Under the cash basis, revenue is recognized when cash is received; under the accrual basis, revenue is recognized as it is earned, requiring adjustments to reflect actual services performed. What adjustment is needed to convert from cash basis to accrual basis when not all prepaid services have been performed?
Debit Revenue for the unearned portion and credit Unearned Revenue to reflect the amount still owed to the customer. If a company received $1,000 in advance and has only earned $600 by period end, what is the correct revenue balance under accrual accounting?
The correct revenue balance is $600, representing the amount actually earned during the period. Why is it necessary to make adjusting entries for unearned revenue at the end of an accounting period?
Adjusting entries ensure that only revenue actually earned is reported in the income statement and that liabilities reflect services still owed. What happens to the liability account 'Unearned Revenue' as services are performed?
The liability decreases as services are performed and the corresponding amount is recognized as earned revenue. How would you calculate the amount to transfer from unearned revenue to earned revenue if given the total prepaid amount, total service hours, and hours performed?
Divide the total prepaid amount by total service hours to get the rate per hour, then multiply by hours performed to determine the amount to transfer from unearned to earned revenue.
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