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Chapter 3: Q. 3-2SE-b (page 157)

Protection Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Protection Home has collected \(900 from cash-paying customers. Protection Home’s remaining customers owe the business \)1,300. How much service revenue would Protection Home have for the year under the a. cash basis? b. accrual basis?

Short Answer

Expert verified

Service revenue equals $2,200.

Step by step solution

01

Explanation on Accrual Basis Accounting

Under this method, revenues and expenses are recorded on the basis of revenue earned and expenses incurred.

02

Calculation of Service Revenue

In the given case, company has not received $1,300 from the customers, hence total service revenue will include amount received and outstanding amount.

Calculation of service revenue:

ServiceRevenue=cashreceived+outstandingamount=$900+1,300=$2,200

Thus, service revenue is $2,200.

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Question :At the beginning of the year, Modish Advertising owed customers \(2,100 for unearned revenue collected in advance. During the year, Modish received advance cash receipts of \)6,100 and earned \(20,000 of service revenue (exclusive of any amount earned from advance payments). At year-end, the liability for unearned revenue is \)3,100 and unadjusted service revenue is $20,000. Requirements 1. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a liability account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance and additional unearned revenue in the Unearned Revenue T-account. 2. Record the adjusting entry assuming that Modish records the cash receipt of unearned revenue by initially crediting a revenue account. Post the adjusting entry to the Unearned Revenue and Service Revenue T-accounts. Make sure to include the beginning balance in the Unearned Revenue T-account and the additional unearned revenue in the Service Revenue T-account. 3. Compare the ending balances of the T-accounts under both approaches. Are they the same?

What are the two rules to remember about adjusting entries?
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