Question 3 Explanation

Question #3: Based on the information from Question #2, what adjusting entry should Steez Inc. make prior to preparing financial statements on April 30th?

So far, Steez Inc. has made only the following two entries related to this advance payment:

  1. The March 1st entry to record the receipt of the $33,000 cash.
  2. The March 31st adjusting entry.

Answer

TransactionDebitCredit
Unearned Revenue11,000
     Service Revenue11,000

Explanation

As Steez Inc. performs the services each month, it can record the amount performed for that month as revenue (specifically the Service Revenue account) and take the amount out of Unearned Revenue since they no longer have that liability.

So, after the second month’s performance of the services at the end of April, Steez Inc. will decrease the Unearned Revenue account. Since that account is a liability, we'll decrease it with a debit.

TransactionDebitCredit
Unearned Revenue???
     ??????

By how much will we debit it?

Remember, Steez Inc. was initially paid $33,000 to cover 3 months of services. Therefore, each month we'll decrease Unearned Revenue by $11,000.

TransactionDebitCredit
Unearned Revenue$11,000
     ??????

For every debit, there must be a credit. What account are we going to credit here?

The Service Revenue account! Essentially what this says is: "Hey, we finally did a month's work of service on that lump sum payment we received! Now that we've done it, record it!"

Since we're essentially increasing revenue here, we must credit the Service Revenue account.

TransactionDebitCredit
Unearned Revenue$11,000
     Service Revenue???

By how much? The same amount of $11,000, since that's the month's worth of work performed in April!

TransactionDebitCredit
Unearned Revenue$11,000
     Service Revenue$11,000

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