On 1 May 2018, Dress in Style received a $2000 advance payment from a customer for the design and making of a formal gown. The gown is expected to be completed by the end of August 2018. By 30 June 2018, approximately half of the dress is complete. The correct adjusting entry to be recorded at 30 June 2018 is:
A) DR Dress-making expenses $1000; CR Unearned income $1000
B) DR Unearned income $1000; CR Bank $1000
C) DR Unearned income $1000; CR Dress-making income $1000
D) DR Income earned $1000; CR Dress-making income $1000

Question

Quizplus · Accepted Answer

The adjusting entry needs to recognize the portion of the advance payment that has been earned by June 30. As half of the dress is complete, the portion of the payment that has been earned is $1000 (50% of $2000). Therefore, the correct entry is to debit Unearned Income for $1000 (to reduce the liability) and credit Dress-making Income for $1000 (to recognize the revenue earned). Option A is incorrect as it recognizes an expense, but does not reflect the revenue earned. Option B does not reflect the earnings and would only be recorded if the advance payment was received in cash. Option D is incorrect as it does not correctly reflect the accounts affected by the transaction.

On 1 May 2018, Dress in Style Received a $2000