Chapter 3, Problem E3A.32E

Understanding the alternative treatment of unearned revenues

Learning Objectives 3, 7 Appendix 3A

At the beginning of the year, Modish Advertising owed customers $2, 100 for unearned revenue collected in advance. During the year, Modish received advance cash receipts of $6, 100 and earned $20,000 of service revenue (exclusive of any amount earned from advance payments). At year-end, the liability for unearned revenue is $3, 100 and unadjusted service revenue is $20,000.

Requirements

1. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a liability account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance and additional unearned revenue in the Unearned Revenue T-account.
2. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a revenue account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance in the Unearned Revenue T-account and the additional unearned revenue in the Service Revenue T-account.
3. Compare the ending balances of the T-accounts under both approaches. Are they the same?