Question

lark Bell started a personal financial planning business when he accepted $36,000 cash as advance payment for managing the financial assets of a large estate. Bell agreed to manage the estate for a one-year period beginning June 1, Year 1. Required Show the effects of the advance payment and revenue recognition on the Year 1 financial statements using the following horizontal statements model. In the Cash Flows column, use OA to designate operating activity, IA for investing activity, FA for financing activity, and NC for net change in cash. If the account is not affected, leave the cell blank. How much revenue would Bell recognize on the Year 2 income statement

Answer 1

The Effects of the Advance Payment (Receipt) on Lark Bell's Year 1 Financial Statements are:

                    Balance Sheet                                                                                                                      

              Assets =  Liabilities                                  + Equity  

Cash +$36,000 = Unearned revenue +$15,000 + Service Revenue +$21,000

                                 Income Statement                              Cash Flow

                     Revenue - Expense = Income                         Statement

Service Revenue +$21,000                                 Cash inflow +$36,000 OA

In Year 1, the Assets (Cash) will increase by $36,000.  There is a corresponding increase in Liabilities (Unearned Revenue) of $15,000 and an increase in Equity (Service Revenue) of $21,000.

Thus, the amount of revenue that Bell would recognize on the Year 2 income statement from this transaction in Year 1 is $15,000.  This covers 5 months from January to May.

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