Answer:
c. Decrease liabilities and increase revenues.
Explanation:
Duluth Co. collected a $6,000 cash advance from a customer on November 1, 2016 for work to be performed over a six-month period beginning on that date.
If the year-end adjustment is properly recorded, the effect of the adjusting entry on Duluth's 2016 financial statements will be a decrease in liabilities and increase in revenues.
This will be the case because when Duluth Co. collected a $6,000 cash advance from a customer on November 1, it would have passed the following entries:
Dr Cash................$6000
Cr Prepaid Revenue...$6000
But note that 'prepaid revenue' is a liability which is why it has a credit balance.
By year end, the adjustment will be to take credit to revenue for 2 months that has elapsed for November and December, which is 2/6 x $6000.
Hence the entry will be:
Dr. Prepaid Revenue.....$2000
Cr. Revenue....................................$2000
which implies that the liability of prepaid revenue has reduced and revenue has increased
