Question

In advance payment of 1000 for services was received on December 1 and was recorded as a liability by the end of the year. 400 has been earned. Does this demonstrate the December 31 adjusting entry?

1) Yes
2) No
3) Cannot be determined

Answer 1

The question asks if the recorded adjusting entry correctly demonstrates the activity of earning part of the advance payment by year-end. Since 400 of the 1000 advance payment has been earned, the adjusting entry reducing the liability and recognizing the revenue is correct.

Step-by-step explanation:

The question relates to the concept of adjusting entries in accounting. When a company receives an advance payment for services, it records the payment as a liability because the services have not yet been provided. By the end of the year, if the company has earned a portion of the advance payment, it must make an adjusting entry to recognize the revenue earned to that point.

In this scenario, the company has recorded an advance payment of 1000 as a liability on December 1. By December 31, the company has earned 400 of that amount. Therefore, the correct adjusting entry would be to reduce the liability by 400 and to recognize that amount as revenue. This indicates that the adjusting entry indeed demonstrates the activity by showing that a portion of the advance payment has now been earned.