Question

Hercules Workout World gains a client who prepays $ 660 for a package of six physical training sessions. Hercules Workout World collects the $ 660 in advance and will provide the training later. After four training​ sessions, what should Hercules Workout World report on its income statement assuming it uses the accrual basis accounting​ method? A. Service revenue of $ 660 B. Cash of $ 220 C. Unearned service revenue of $ 440

Answer 1

Service revenue of $ 440

Step-by-step explanation:

When the customer prepays, the revenue is yet to be earned hence the entries required would be a debit to cash account and a credit to unearned or deferred revenue.

As the service is rendered and revenue is earned, debit the deferred revenue account and credit the revenue account with the amount earned.

Since $660 was collected for 6 training sessions

Revenue from a training session

= 1/6 × $660

= $110

After 4 training sessions, revenue earned and to be recognized in the income statement

= 4 × $110

= $440