Question

Yard Designs (YD) experienced the following events in 2018, its first year of operation: 1. On October 1, 2018, YD collected $54, 000 for consulting services it agreed to provide during the next 12 months. 2. Adjusted the accounts to reflect the amount of consulting service revenue recognized in 2018. Based on this information alone: a. Record the events under an accounting equation. b. Prepare an income statement, balance sheet, and statement of cash flows for the 2018 accounting period. c. Ignoring all other future events, what is the amount of service revenue that would be recognized in 2019? Complete this question by entering your answers in the tabs below. Record the events under an accounting equation. (Do not round intermediate calculations. Enter any decreases to account balances with a minus sign.)

Answer 1

Yard Designs records advance payment as unearned revenue, which is recognized over time as services are provided. The initial unearned revenue of $54,000 results in a recognized revenue of $13,500 for the 2018 period, with a remaining balance of $40,500 as unearned revenue to be recognized in 2019.

Step-by-step explanation:

When a company like Yard Designs (YD) receives an advance payment for services to be provided in the future, it records the transaction as unearned revenue, which is a liability. As services are performed over time, this liability is converted into earned revenue, which is reported on the income statement.

Accounting Equation

Assets = Liabilities + Equity

1. Upon receiving the $54,000:
Cash (Asset) increases by $54,000
Unearned Revenue (Liability) increases by $54,000

2. At the end of 2018 (assuming a 3-month period of revenue recognition out of 12 months):
Unearned Revenue decreases by $13,500 ($54,000 / 4, because 3 of 12 months have passed)
Service Revenue (Equity) increases by $13,500

Income Statement for 2018

Revenues: $13,500 (Recognized portion of the advance payment)
Expenses: $0 (No expenses have been reported)
Net Income: $13,500

Balance Sheet as of December 31, 2018

Assets:
Cash: $54,000
Total Assets: $54,000

Liabilities:
Unearned Revenue: $40,500 (Remaining liability)
Total Liabilities: $40,500

Equity:
Retained Earnings (Net Income): $13,500
Total Equity: $13,500

Total Liabilities and Equity: $54,000

Statement of Cash Flows for 2018

Operating Activities:
Net Income: $13,500
Changes in Operating Liabilities (Unearned Revenue): +$40,500
Net Cash Provided by Operating Activities: $54,000

Investing Activities: $0
Financing Activities: $0
Net Increase in Cash: $54,000

Cash at Beginning of Period: $0
Cash at End of Period: $54,000

Service Revenue in 2019

The amount of service revenue that will be recognized in 2019 is the remaining balance of the unearned revenue at the end of 2018, which is $40,500.

Answer 2

Please see the solution below:

Step-by-step explanation:

1. Accounting Equation is an equation where assets are always equal to Liabilities and Owners' Equity.

We know from the question that Yard Design (YD) has collected $54,000 for consulting services to be provided in next 12 months, and accounting period starts on 1st of January and ends on 31st of December. So when solving accounting equation for 2018, we know that consulting service fee was collected on 1st of October. Hence there will be two types of Incomes generated from this event.

2. First we have Income which is realized and should be accounted in Income Statement as our revenue, which will be in this case for 3 months from 1st of October 2018 to 31st of December 2018.

Second we have unrealized income or unearned income and should be accounted in Balance Sheet. As we know that Accounting Equation reflects the mirror image of Balance Sheet, so for the remaining 9 months unearned income will be reported in Balance Sheet and should be computed using accounting equation as follows;

a. Accounting Equation

Assets = Cash = $54,000

Liabilities = Unearned Revenue = ?

Owners' Equity = Retained Earnings = ?

Unearned Revenue = Cash x Number of Incomplete Months / 12 Months

Unearned Revenue = $54,000 x 9/12

Unearned Revenue = $40,500

Retained Earnings = Cash - Unearned Revenue

Retained Earnings = $54,000 - $40,500

Retained Earnings = $13,500

Assets = Liabilities + Owners' Equity

or

Cash = Unearned Revenue + Retained Earnings

$54,000 = $40,500 + $13,500

b.

Yard Design

Income Statement

For the Year ended December 31, 2018

Revenue $13,500

Less: Expenses $0

Net Income $13,500

Yard Design

Balance Sheet

For the Year ended December 31, 2018

Assets

Cash $54,000

Total Assets $54,000

Liabilities

Unearned Revenue $40,500

Total Liabilities $40,500

Owners' Equity

Retained Earnings $13,500

Total Owners' Equity $13,500

Total Liabilities and Owners' Equity $54,000

Yard Design

Statement of Cash Flow

For the Year ended December 31, 2018

Net Income $13,500

Add: Cash Flows from operating activities

Increase in Accounts Payable $40,500

Net Cash Flow from Operating Activities $54,000

Cash Flows from Investing Activities $0

Cash Flows from Financing Activities $0

Add: Opening Cash Balance $0

Ending Cash Balance $54,000

c. Amount of Service Revenue recognized in 2019.

Unearned Revenue = Cash x Number of Incomplete Months / 12 Months

Unearned Revenue = $54,000 x 9/12

Unearned Revenue = $40,500