Wave Inn is a resort located in Canada. Wave Inn collects cash when guests make a reservation. During December 2013, Wave Inn collected $75,000 of cash and recorded the receipt by recognizing unearned revenue. By the end of the month Wave Inn had earned one third of this amount, the other two thirds will be earned during January 2014. The adjusting entry required at December 31, 2013 would impact the statement of financial position by
A) Increased Equity $50,000.
B) Decreased Liabilities $25,000.
C) Increased Assets $75,000.
D) Decreased Equity $25,000.

Question

Quizplus · Accepted Answer

The adjusting entry required at December 31, 2013 would decrease unearned revenue (a liability account) by $25,000 (one-third of the total collected) and increase revenue (an equity account) by $25,000. Therefore, the entry would decrease liabilities by $25,000 and have no impact on assets. Option A is incorrect because the adjusting entry would increase equity by only $25,000, not $50,000. Option C is incorrect because the entry would not increase assets. Option D is incorrect because the entry would not decrease equity.

Wave Inn Is a Resort Located in Canada