On September 1, Advantage Maintenance Company contracted to provide monthly maintenance services for the next five months at a rate of $3,000 per month. The client paid Advantage $15,000 on September 1. The maintenance services began on that date. Assuming Advantage records deferred revenues using the alternative treatment, what would be the adjusting entry recorded on December 31?

Question

Quizplus · Accepted Answer

Since Advantage Maintenance Company records deferred revenues using the alternative treatment, revenue recognition occurs when the services are provided, not when cash is received. Therefore, at the end of December, three months of maintenance services would have been provided, equaling $9,000 ($3,000 per month x 3 months).

Initially, the $15,000 received from the customer was recorded as unearned revenue. To adjust the accounts for the revenue earned in December, the following adjusting entry is needed:

Debit Service Revenue for $3,000
Credit Unearned Revenue for $3,000

This entry records the revenue earned in December and reduces the liability for unearned revenue by the same amount. The effect of the adjusting entry is to increase the Assets and Equities by $3,000 while decreasing the Liabilities by the same amount.

On September 1, Advantage Maintenance Company Contracted to Provide Monthly