Final answer:
By December 31, Year 2, all services for which the cash prepayment of $1,200 was received on August 1 of Year 1 would have been rendered. Hence, there would be zero unearned revenue on the balance sheet. Thus, the option "A" is the correct option.
Step-by-step explanation:
The question is asking how to account for unearned revenue on a balance sheet given that cash has been received for services that are to be provided over a one-year period. Since the cash was received on August 1 of Year 1, and it covers services for the next twelve months, by December 31 of Year 2, all services would have been rendered. This is crucial for determining the unearned revenue.
Since unearned revenue represents prepayments for services that have not yet been delivered, it would initially be recorded as a liability. However, as the company provides services over time, this liability is decreased proportionally and revenue is recognized. By December 31, Year 2, since the one-year term has concluded, there would be no unearned revenue left, with all $1,200 having been recognized as revenue over the course of the year.