On January 1 20X1 CleanCo credited Revenue for a 4000 prepay

On January 1, 20X1 CleanCo credited Revenue for a $4,000 prepayment it received from a customer for maintenance services to be provided over the next two years. If Revenue is not adjusted as of December 31, 20X1.....

(a) assets will be overstated by $2,000

(b) net income will be understated by $2,000

(c) revenues will be overstated by $2,000

(d) retained earnings will be understated by $2,000

Solution

Journal Entries

Debit

Credit

Cash

4000

Revenue

4000

Revenue

2000

Unearned revenue

2000

Being an adjustment entry for Unearned revenue

The above two enrtries should be passed for correct accounting treatment. In second entry we are debiting revenue which means we are reducing revenue to be recognised in first year. If the Revenue is not adjusted as of December 31, 20X1 then (C) Revenues will be overstated by $ 2,000.