Avatar,Inc.began operations on July 1,2011.On August 1,it received $24,000 in advance for services to be performed evenly over the next 12 months.How much of this revenue should the company report on its income statement for the year ended December 31,2012?

Question

Quizplus · Accepted Answer

Since the company received the $24,000 in advance, it should initially record it as a liability on the balance sheet. As services are performed, the company can recognize revenue for the portion of the advance that corresponds with the services rendered. Since the advance was for services to be performed evenly over 12 months, the company should recognize 1/12th, or $2,000, of the advance as revenue for each month. For the year ended December 31, 2012, the company would have performed services for 5 months (August through December), so it should recognize $2,000 x 5 months = $10,000 as revenue on its income statement. Therefore, the correct answer is C.