Final answer:
The sale of 1,800 season ticket packages at $335 before the first show results in an increase in deferred revenue and cash for the theater company. Revenue will not increase until each show is performed, and accounts receivable will not increase as payment is received upfront. Option 1 is correct.
Step-by-step explanation:
When a local theater company sells 1,800 season ticket packages at a price of $335 per package before the first show in a 10-show season, there are a few accounting and financial effects. Firstly, there will be an increase in deferred revenue, as the company has received the money for services (the shows) that have not yet been performed. This is an obligation that the company needs to fulfill in the future.
Secondly, there will be an increase in cash, as the company collects the payment for the season ticket packages immediately upon sale. This results in an increased cash balance on the company’s balance sheet.
However, there is not an immediate increase in revenue, because under accrual accounting standards, revenue is recognized when the service is delivered, not when the payment is received. This means revenue typically only increases as each show is performed. There will also not be an increase in accounts receivable, because this transaction does not involve credit sales; cash is received upfront.