Question

Classic Artists' Services signed a contract with a maintenance service company to maintain a building that Classic will use for office purposes. The contract states that the work will begin work on February 1 and end on May 31. Classic Artists' will pay the maintenance service company $2,000 at the end of May. It accrues Maintenance Expense at the end of every month. What is the balance in the Accounts Payable account for amounts owed to the maintenance service company at the end of March?A) Debit balance of $2,000B) Credit balance of $1,000C) Debit balance of $1,000D) Credit balance of $2,000

Answer 1

Answer:

C. Credit Balance of $ 1,000

Explanation:

Classic Artists' Services at the time of making a contract with maintenance service company will not make any entry in financial statements as there is no services taken at the moment.

At the end of each month starting from February Classic Artists' Services will recognize an maintenance expense and a liability of accrued maintenance of $ 500 ($ 2,000 ÷ 4).

Entry will be:

Dr: Maintenance Expense     $ 500

Cr: Accrued Maintenance Payable     $ 500.

This entry will continue till May 31.

So the balance on account payable account in March will be $ 1,000 ($500 for Feb + $ 500 for March)

Answer 2

Answer:

B) Credit balance of $1,000

Explanation:

When a company enjoys a service it is yet to pay for over time, the entries required at the end of each accounting period (months in this case) will be

Debit expense

Credit Accounts payable

As such, given that the maintenance service is to be provided to the company   from February 1 and end on May 31 (4 months)

Monthly expense = 1/4 * $2,000

= $500

Amount to have been accrued by end of March (2 months)

= 2 * $500

= $1,000

This will be a credit in the accounts payable.