Question

On september 1, capitol maintenance company contracted to provide monthly maintenance services for the next nine months at a rate of $2,400 per month. the client paid capitol $21,600 on september 1. the maintenance services began on that date. assuming capitol records deferred revenues using the alternative treatment, what would be the adjusting entry recorded on december 31?

Answer 1

Upon receiving the $21,600 payment of the client, Capitol should recognize a deferred revenue. Deferred revenue is the receipt of compensation when the services are not yet rendered. Since they started on September 1, they have rendered four months of service to the client until December 31. The rate of their services is $2,400 per month. Therefore, they have earned $9,600 for the current year. This is the adjusting entry to recognize revenue for the year: 

Deferred Revenue                          9,600

       Service Revenue                                       9,600

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