Final answer:
An adjusting entry is necessary as of December 31, 2011 to properly reflect the revenue earned for the maintenance services provided in 2011. The initial prepayment of $4,000 was recorded as a liability on January 1, 2011, and an adjusting entry on December 31, 2011 is needed to reduce the liability and recognize the revenue earned during the year.
Step-by-step explanation:
An adjusting entry is necessary as of December 31, 2011 to properly reflect the revenue earned for the maintenance services provided in 2011. The initial prepayment of $4,000 was recorded as a liability (unearned revenue) on January 1, 2011. Over the course of the year, as CleanCo provides the maintenance services, the unearned revenue should be reduced and the revenue earned should be recognized.
To reflect this, an adjusting entry should be made on December 31, 2011 to debit the liability account (unearned revenue) and credit the revenue account. The amount debited and credited would depend on the amount of revenue actually earned during the year. Once this adjustment is made, the financial statements will accurately reflect the revenue earned for the maintenance services provided in 2011.
For example, if CleanCo provided $2,000 worth of maintenance services in 2011, the adjusting entry on December 31, 2011 would debit the unearned revenue account for $2,000 and credit the revenue account for $2,000, reducing the liability and recognizing the revenue.