On December 1, 2012, Mindy's Daycare receives $2,700 in advance for an agreement to care for Susan's children for the months of December, January, and February. Mindy's Daycare will make an adjusting entry on December 31, 2012 to:

Question

Quizplus · Accepted Answer

When Mindy's Daycare receives advance payment, it is recorded as Unearned Revenue because the service has not yet been provided. However, by the end of December, Mindy's Daycare has provided one month of service out of the three months covered by the advance payment. Therefore, $900 of the Unearned Revenue needs to be recognized as Revenue in December through an adjusting entry. The other $1,800 ($900 × 2) will be recognized as Revenue in January and February, respectively. Thus, the correct answer is to debit Unearned Revenue for $900.

On December 1, 2012, Mindy's Daycare Receives $2,700 in Advance