Question

Sierra Corporation received $1,200 on October 2 from R. Knox for guide services. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation, Sierra determines it earned $400 in October. What is the adjusting entry?

a. Debit Unearned Service Revenue $1,200; Credit Service Revenue $1,200

b. Debit Service Revenue $400; Credit Unearned Service Revenue $400

c. Debit Unearned Service Revenue $800; Credit Service Revenue $800

d. Debit Service Revenue $1,200; Credit Unearned Service Revenue $1,200

Answer 1

The correct adjusting entry for Sierra Corporation to recognize $400 of earned revenue from a $1,200 prepayment is to debit Unearned Service Revenue and credit Service Revenue by $800. Thus, the correct option is c

Step-by-step explanation:

Sierra Corporation's adjusting entry to account for the earning of $400 of the $1,200 prepayment for guide services would be:

Debit Unearned Service Revenue $800; Credit Service Revenue $800.

The $1,200 initially received was recorded as Unearned Service Revenue, which is a liability representing the services that were owed. As Sierra Corporation performed $400 worth of services in October, they need to recognize that portion as earned revenue. Therefore, they will reduce the liability (Unearned Service Revenue) by $800 and increase the revenue (Service Revenue) by the same amount, reflecting the unearned portion that remains as of October 31.

So, the correct answer is c. Debit Unearned Service Revenue $800; Credit Service Revenue $800.