Question

A company received $8,000 for 100 one-year subscriptions on July 1. The journal entry to record this cash receipt would include a ________. The company uses a liability account for revenue received in advance.

A. credit to Unearned Revenue for $8,000
B. credit to Accounts Payable for $5,000
C. credit to Unearned Revenue for $5,000
D. debit to Prepaid Expenses for $5,000
E. None of the above

Answer 1

The correct journal entry for the prepayment of subscriptions is to debit Cash for $8,000 and credit Unearned Revenue for $8,000 since the service will be provided in the future.

Step-by-step explanation:

The journal entry to record the cash receipt for one-year subscriptions in advance will affect two accounts: Cash and Unearned Revenue. When cash is received, the Cash account is debited for the entire amount received, which in this case is $8,000. As the subscriptions are for a future period and the service has not yet been provided, this creates a liability for the company. Hence, Unearned Revenue is credited for the same amount since it represents revenue that is expected to be earned in the future.

The correct journal entry for this transaction is:

Credit Unearned Revenue $8,000 (Increase in liability)

Therefore, the correct answer to the student's question is A. credit to Unearned Revenue for $8,000.