On September 1,Capitol Maintenance Company contracted to provide monthly maintenance services for the next nine months at a rate of $2,400 per month.The client paid Capitol $21,600 on September 1.The maintenance services began on that date.Assuming Capitol records deferred revenues using the alternative treatment,what would be the adjusting entry recorded on December 31?

Question

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Capitol Maintenance Company is using the alternative treatment for deferred revenue accounting. The company recorded $21,600 as unearned revenue on September 1 when the client paid in advance for the maintenance services for the next nine months. Since three months have already passed by the end of December, Capitol would have earned 3/9 or 1/3 of the $21,600 collected in advance. Therefore, the adjusting entry should be to recognize one-third of the unearned revenue as earned revenue. This means debiting Service Revenue for $8,000 ($2,400 x 3) and crediting Unearned Revenue for $8,000. So, the adjusting entry recorded on December 31 would be: Debit Service Revenue and credit Unearned Revenue for $12,000.

On September 1,Capitol Maintenance Company Contracted to Provide Monthly Maintenance