Question

On October 1, Year 1, Swift Corporation received $1,200 from customers for services to be performed evenly over the next 12 months. Swift recorded the original transaction in a balance sheet account. The adjusting journal entry on December 31, Year 1, will include which of the following entries?

a)Debit revenue $300.
b)Debit to deferred revenue $300.
c)Credit to revenue $1,200.
d)Credit deferred revenue $1,200.

Answer 1

The correct adjusting journal entry on December 31, Year 1, for Swift Corporation after receiving $1,200 for services to be delivered over the next twelve months includes a debit to deferred revenue for $300 and a credit to revenue for $300 to recognize the income earned over three months.

Step-by-step explanation:

The student's question pertains to how to account for deferred revenue on the financial statements of Swift Corporation.

When Swift Corporation received $1,200 for services to be performed over the next 12 months, they recorded it as a liability under deferred revenue; this is because the service had not yet been provided - hence, the revenue had not been earned. Given that the services are to be performed evenly over 12 months, each month would represent $100 of earned service ($1,200 / 12 months).

By December 31, Year 1, three months would have passed (October, November, and December), so Swift Corporation would have earned $300 of the $1,200 ($100 per month x 3 months). Therefore, the proper adjusting journal entry on December 31, Year 1, would include a debit to deferred revenue for $300 (to reduce the liability) and a credit to revenue for $300 (to recognize the income that has been earned).