Question

Athens Delivery Service is hired on October 31, 2018 to perform services, beginning on November 1, 2018. The delivery services will be performed for six months at a rate of $3300 per month. Athens' fiscal year ends on December 31. What amount of service revenue should be recorded as an adjusting entry on December 31, 2018?

Answer 1

1. Answer: $6600 Explanation: Athens' entered into a contract to deliver services from November 1. This contract is valid for 6 months. Their fiscal year ends on December 31. This means that only 2 months worth of services will be delivered in 2018. Even if Athens received cash for the full 6 months they can only record the revenue when they have fulfilled the obligations and rendered the service. Because only 2 months were rendered in 2018, they can only record $6600 ($3300 × 2 months) in the 2018 fiscal year. The outstanding 4 months' balance will remain in income received in advance account until these 4 months' services are actually rendered and the obligation is fulfilled by Athens.