Duluth Company collected a $6,000 cash advance from a customer on November 1, Year 1 for services to be provided over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements?
A)Increase assets and decrease liabilities
B)Increase assets and increase revenues
C)Decrease liabilities and increase revenues
D)No effect

Question

Quizplus · Accepted Answer

The adjusting entry will recognize a portion of the $6,000 cash advance as revenue for services that have been earned as of year-end. This will increase revenues, which will in turn increase net income and retained earnings (assuming Duluth has a profit for the year). At the same time, the liability for the unearned portion of the cash advance will be reduced, decreasing liabilities. Therefore, the correct choice is (C) Decrease liabilities and increase revenues.

Duluth Company Collected a $6,000 Cash Advance from a Customer