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7. On December 1, Year 1, Jack's Snow Removal Company received $10,500 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial explration of the contract impact the elements of the financial statements model? Multiple Choice Equity will increase by $3,500 Total assets will increase by $3,500 Total liabilities will increase by $3,500 Equity will increase by $3,500 and Total assets will increase by $3,500

7. On December 1, Year 1, Jack's Snow Removal Company received $10,500 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial explration of the contract impact the elements of the financial statements model? Multiple Choice Equity will increase by $3,500 Total assets will increase by $3,500 Total liabilities will increase by $3,500 Equity will increase by $3,500 and Total assets will increase by $3,500

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Understanding Year-End Adjustments - Educational Module **Financial Statement Adjustments - Multiple Choice Question** --- **Question 7:** On December 1, Year 1, Jack’s Snow Removal Company received $10,500 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial expiration of the contract impact the elements of the financial statements model? **Options:** 1. ☐ Equity will increase by $3,500 2. ☐ Total assets will increase by $3,500 3. ☐ Total liabilities will increase by $3,500 4. ☐ Equity will increase by $3,500 and Total assets will increase by $3,500 --- *Note:* Make sure to select the most appropriate option based on an understanding of how service contracts and advance payments are accounted for in financial statements. **Explanation:** When a company receives cash in advance for services to be provided in future months, it records the cash as a liability (Unearned Revenue) because it owes the service to the customer. As the company performs the service over time, it recognizes revenue and reduces the liability. The financial statement impact will reflect this through adjustments to equity and liabilities, consistent with the revenue recognition principle. --- Use this example to deepen your understanding of the financial statements model and year-end adjustments.
Transcribed Image Text:### Understanding Year-End Adjustments - Educational Module **Financial Statement Adjustments - Multiple Choice Question** --- **Question 7:** On December 1, Year 1, Jack’s Snow Removal Company received $10,500 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial expiration of the contract impact the elements of the financial statements model? **Options:** 1. ☐ Equity will increase by $3,500 2. ☐ Total assets will increase by $3,500 3. ☐ Total liabilities will increase by $3,500 4. ☐ Equity will increase by $3,500 and Total assets will increase by $3,500 --- *Note:* Make sure to select the most appropriate option based on an understanding of how service contracts and advance payments are accounted for in financial statements. **Explanation:** When a company receives cash in advance for services to be provided in future months, it records the cash as a liability (Unearned Revenue) because it owes the service to the customer. As the company performs the service over time, it recognizes revenue and reduces the liability. The financial statement impact will reflect this through adjustments to equity and liabilities, consistent with the revenue recognition principle. --- Use this example to deepen your understanding of the financial statements model and year-end adjustments.
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