Question

Jack’s Snow Removal Company received a cash advance of $6,000 on December 1, 2016 to provide services during the months of December, January, and February. The 2016 year-end adjustment to recognize the partial expiration of the contract will

A. increase assets by $2,000
B. increase equity by $2,000
C. increase liabilities by $2,000
D. increase assets by $2,000 and increase equity by $2,000

Answer 1

B. increase equity by $2,000

Step-by-step explanation:

As the cash received in advance is recorded as unearned revenue which is a liability of the company because company did not provide the services. on December 31, One month has been passed and services for this month has been provided. One months revenue is accrued and recorded as follow:

Dr. Unearned Revenue $2,000

Cr. Revenue $2,000

December Revenue = $6,000 /3 = $2,000

The debit entry will decrease the liability and credit entry will increase the equity by $2,000 because impact of increase in revenue will ultimately go to the equity balance.