Question

6. June 8, 2017 - NoDirt entered into a one year contract to provide cleaning

services to a customer. NoDirt will start providing the services on July 1,
2017. The customer paid NoDirt $4,500 cash when the contract was signed on
June 8, 2017. The $4,500 is payment for the first three months of cleaning
service.

Answer 1

The journal entries are provided in explanation.

Step-by-step explanation:

Overview:

• Deferred revenues reflect situations in which money has been received, but goods and services haven't been provided.

• Also known as deposits, and they are not recognized as revenues in the income statement.
• Are not "real revenues." They don't affect net income or loss at all.
• They report on the balance sheet as liabilities.
• The journal entry to recognize a deferred revenue is to debit or increase cash and credit or increase a deposit or another liability account.
• When services or goods are provided, the entry is to debit or decrease the deposit account and credit or increase the revenue account – the "real" one, which reports in the income statement and impacts net income or loss.

Payment for 3 months received in advance on June 8, 2017 = $4,500

Payment per month = $1,500

Payment for one year = $1,500 × 12 = $18,000 for one year.

Journal entry to create deferred revenue is as follows:

On June 8, 2017:

Debit: Cash account $4,500

Credit: Deferred income $4,500

On July 1, 2017

Debit: Deferred income $1,500

Credit: Cleaning service income $1,500