Question

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1: (1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1. (2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800. (3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000. (4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year. (5) Fees of $9,800 were earned during the month for clients who had paid in advance. After the appropriate adjusting entry is recorded, the balance in the liability account Unearned Fees will:

Answer 1

Answer: Decrease by $9,800

Explanation:

It is shown that fees of $9,800 were earned during the month from clients who had paid in advance. Unearned fees are liabilities because they represent revenue that a company made for services it has not delivered yet.

When the company delivers the service like these ones just did, they will reduce this liability because they have now earned this revenue by delivering the service.

Omega will therefore reduce their unearned fees account by $9,800.