Question

Disco World began its business on November 1 and sold contracts to twelve students for dance lessons that day. The lessons cost $375 per person for a three-month period and the students are required to pay in advance. Assuming Disco World adjusts its accounts only at its December 31 year end, what entry must Disco World make to account for the services provided through that date?

a. Debit Cash and credit Dance Lessons Revenue for $3,000
b. Debit Unearned Revenue and credit Dance Lessons Revenue for $4,500
c. Debit Unearned Revenue and credit Dance Lessons Revenue for $3,000
d. Debit Dance Lessons Revenue and credit Unearned Revenue for $3,000

Answer 1

c. Debit Unearned Revenue and credit Dance Lessons Revenue for $3,000

Step-by-step explanation:

When a fee is received in advance for a service yet to be rendered, the revenue for such fee is said to be unearned. The entries required are

Debit Cash account and Credit Unearned fees or deferred revenue.

As the service is performed and the revenue is earned, debit Unearned fees and credit revenue.

Amount of revenue earned between 1 November and 31 December

= 2/3 * 375 * 12

= $3,000

Answer 2

On November 1:

Dr Cash ($375*12) $4500

Cr Unearned service revenue $4500

On December 31:

Dr Unearned service revenue 4500*(2/3) $3000

Cr Service revenue $3000

Step-by-step explanation:

On First November: The receipt from service sales must be recorded as under:

Dr Cash ($375*12) $4500

Cr Unearned service revenue $4500

The Earned revenue is the concept in accrual accounting which says that the revenues must be recognised when the revenues are earned, which means the company has delivered its part. As in this case, the company has not yet delivered its part, so unearned service revenue (Liability account) must be opened with the amount received.

On December 31, The company must recognise sales earned which is 2 out of 3 months earning share as the company has delivered its share of consideration for 2 months. So the double entry would be reversing the unearned service sales with the revenue earned.

Revenue earned = $4500 Unearned service revenue * 2 months / 3 months

Revenue earned = $3000

So the double entry would be:

Dr Unearned service revenue 4500*(2/3) $3000

Cr Service revenue $3000