Munster Company requires clients to pay in advance for legal services. One such client made a $4,000 payment on May 1, and Munster Company recorded this transaction in the appropriate liability account. As of May 20, the legal services which the client requested had been completed. The May 20 accounting entry will:
A) decrease assets and decrease liabilities
B) increase revenues and increase liabilities
C) decrease liabilities and increase revenues
D) decrease assets and increase revenues

Question

Quizplus · Accepted Answer

The payment was initially recorded as a liability (unearned revenue). Once the services are completed, the liability decreases and revenue is recognized, increasing revenues.

Munster Company Requires Clients to Pay in Advance for Legal