In its 2009 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2009. In its reconciliation schedule, WME should:
A)Show a $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue.
B)Show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.
C)Show a $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue.
D)Show a $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue.Unearned revenue, a liability account, increased by the cash received for $681,000 and decreased by the $695,000 revenue recognized.Thus, unearned revenue decreased by $14,000.

Question

Quizplus · Accepted Answer

The $14,000 represents the decrease in unearned revenue, which is a liability account. Under the indirect method, a decrease in a liability account results in a negative adjustment to net income. Therefore, the correct answer is to show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.

In Its 2009 Income Statement, WME Reported $695,000 for Service