Question

On December 1, Smart Touch Learning receives $8,000 cash in advance from a client for performing e-learning services over the next two months (December 1 through January 31). When preparing that adjusting entry, they would....

a) Debit Unearned Revenue $8,000; Credit Service Revenue $8,000
b) Debit Cash $8,000; Credit Service Revenue $8,000
c) Debit Unearned Revenue $8,000; Credit Accounts Receivable $8,000
d) Debit Service Revenue $8,000; Credit Unearned Revenue $8,000

Answer 1

The correct adjusting entry is to debit Unearned Revenue and credit Service Revenue for $8,000. This records the payment as a liability until the services are performed and revenue can be recognized properly.

Step-by-step explanation:

When preparing the adjusting entry for Smart Touch Learning after receiving $8,000 cash in advance for services to be performed over the next two months, the correct entry on December 1 would be to Debit Unearned Revenue $8,000; Credit Service Revenue $8,000. This is because the company has received cash that it has not yet earned and thus it is recorded as a liability (unearned revenue). As the services are performed over the two months, the company will recognize revenue. The incorrect choices are options (b), which does not appropriately reflect the liability of unearned revenue, (c), which introduces accounts receivable unnecessarily, and (d), which contradicts the principles of accounting as it decreases revenue.