Question

Duluth Co. collected a $6,000 cash advance from a customer on November 1, Year 1 for services to be provided over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements?a. Increase assets and decrease liabilities
b. Increase assets and increase revenues
c. Decrease liabilities and increase revenues
d. No effect

Answer 1

Answer:

c. Decrease liabilities and increase revenues

Explanation:

The correct adjusting journal entry which shall be recorded by the Duluth Co. in accounts in respect of advance income as as at December 31, is given below:

                                                              Debit                             Credit

Advance income(Liability)                    $2,000

($6,000/6*2)

Revenue                                                                                      $2,000

Since the liability has been debited in the above mentioned journal entry, which mean that it has been decreased and the revenue has been credited, which means that it has been increased.

So based on the above discussion, the answer is c. Decrease liabilities and increase revenues