Section 4 - Deferred (Unearned) Revenue

Question 1

If the transactional entry for Deferred (Unearned) Revenue was credited to the Revenue account, what would the adjusting be?

Answer 1

If the transactional entry for the advance payment from a customer was recorded in the Revenue account, at the end the period if all the revenue was not earned, the adjusting entry at the end of the period is necessary to reduce the balance in the revenue account to reflect only the amount earned in the period and the unearned portion is transferred to the Unearned Revenue account and remains on the books as a liability until earned.

Transactional Entry

Cash (DR)

Revenue (CR)

Adjusting Entry
Revenue (DR) - (decreases the revenue balance by the amount of revenue not earned)

Unearned Revenue (CR) - (increases the liability account to reflect the revenue to be earned in the future)

Question 2

What are the two journal entries required when accounting for Deferrals?

Answer 2

Transactional and Adjusting

Question 3

What is the difference between Accrued and Deferred Revenue?

Answer 3

Accrued revenue has been earned, however, payment has not yet been received.

Deferred revenue has not yet been earned, however, the payment has been received in advance

Question 4

Deferred Revenue is sometimes referred to as:

Answer 4

Unearned Revenue.

Because the revenue is unearned, the recognition of revenue is deferred, postponed, until earned in the future.

Question 5

If the adjusting entry reduced the balance in the Revenue account and transferred the unearned portion to the liability account, what was the transactional entry?

Answer 5

Transactional Entry

Cash (DR)

Revenue (CR)

Adjusting Entry
Revenue (DR) - (decreases the revenue balance by the amount of revenue not earned)

Unearned Revenue (CR) - (increases the liability account to reflect the revenue to be earned in the future)

Question 6

If the transactional entry for Deferred Revenue was credited to the Unearned Revenue account, failure to record the adjusting entry has the following effect: Understated / Overstated / No effect

Assets

Liabilities

Revenue

Net Income

Answer 6

Assets - No effect

Liabilities - Overstated

Revenue - Understated

Net Income - Understated

Question 7

Deferred Revenue is recorded on the books as a ______ until earned.

Answer 7

Liability

Question 8

Cash received before goods are sold or services have been provided is referred to as:

Answer 8

Deferred (Unearned) Revenue

Question 9

If the transactional entry for Deferred (Unearned) Revenue was credited to the Liability account, what would the adjusting entry be?

Answer 9

If the transactional entry recorded the advance payment in the liability account, the adjusting entry at the end of the period simply decreases the amount earned from the balance sheet Unearned Revenue liability account and transfers it to the income statement Revenue account.

Transactional Entry

Cash (DR)

Unearned Revenue (CR)

Adjusting Entry

Unearned Revenue (DR) - (decreases the liability balance by the amount earned)

Revenue (CR) - (increases the Revenue balance to recognize the revenue earned)

Question 10

XYZ co received payment in advance from their customers for consulting work. When the cash was received, the transactional entry credited the Unearned Revenue account.

If no adjusting entry is made at year-end, how are the financial statements be affected?

Answer 10

If no adjusting entry is made at year-end, liabilities would be overstated on the balance sheet because the omitted adjusting entry would have reduced the liability account.

The revenue account would be understated on the Income statement because the omitted adjusting entry would have increased the revenue account, so as a result, the net income would be understated on the income statement.

Transactional Entry

Cash (DR)

Unearned Revenue (CR)

Adjusting Entry

Unearned Revenue (DR) - (decreases the liability balance by the amount earned)

Revenue (CR) - (increases the Revenue balance to recognize the revenue earned)

Question 11

If the transactional entry for Deferred Revenue was credited to the Revenue account, failure to record the adjusting entry has the following effect: Understated / Overstated / No effect

Assets

Liabilities

Revenue

Net Income

Answer 11

Assets - No effect

Liabilities - Understated

Revenue - Overstated

Net Income - Overstated

Question 12

ABC co received payment in advance from their customers for consulting work. When the cash was received, the transactional entry credited the Revenue account.

If not adjusting entry is made at year-end, how are the financial statements be affected?

Answer 12

If no adjusting entry is made at year-end, liabilities would be understated on the balance sheet because the omitted adjusting entry would have increased the liability account.

The revenue account would be overstated on the Income statement because the omitted adjusting entry would have decreased the revenue account, so as a result, the net income would be overstated on the income statement.

Transactional Entry

Cash (DR)

Revenue (CR)

Adjusting Entry
Revenue (DR) - (decreases the revenue balance by the amount of revenue not earned)

Unearned Revenue (CR) - (increases the liability account to reflect the revenue to be earned in the future)

Question 13

Regardless of which account was initially credited when recording the transactional entry for Deferred Revenue, the ending balances in the Revenue and Unearned Revenue account will be the same.

True or False

Answer 13

True.

At the end of the period, in order to adhere to the Revenue recognition principle, the Revenue account must only show the amount earned, and the Unearned Revenue account must reflect the amount to be earned in the future.

Question 14

Not recognizing the revenue unless it has been earned adheres to the _______ principle.

Answer 14

Revenue recognition

Question 15

When cash is received in advance before the work is performed, services are rendered or goods have been delivered, the business incurs a _____ until earned.

Answer 15

Liability.

Question 16

Insure Co has provided a customer with Insurance for the past 6 months, however, payment has not yet been received.

This is an example of:

Answer 16

Accrued Revenue

Question 17

A company collects $11,600 in advance during the year and credits the Revenue account. If at year end all the work has been completed, no adjusting entry is needed.

True or False

Answer 17

True.

All revenue received has been earned, therefore, the accounts do not need to be adjusted.

Question 18

With deferred revenue, payment takes place ______ the revenue is earned.

Answer 18

Before.

The client makes a payment in advance to the company. Since the company has not yet provided the service or sold the good, the income received in advance has not been earned. therefore, cannot be recorded as revenue and is deferred and recognized as a liability until earned in the future.

Question 19

ERICA Co collects cash in advance for a job and credits Deferred (Unearned) Revenue.

If at year-end some of the work has been completed, however, no adjusting entry has been recorded, what is the effect on net income:

(Understated / Overstated / No Effect)

Answer 19

Understated.

Deferred (Unearned) Revenue is a liability account. At year-end, the balance must be reduced by the amount earned which is then transferred to Revenue. If the Revenue account is not credited for the amount earned, then revenue, as well as net income, will be understated.

Question 20

A customer pays Insure Co $16,000 for a two-year Insurance premium.

This is an example of:

Answer 20

Deferred Revenue

Question 21

The Revenue account appears on which Financial statement?

Answer 21

Income Statement

Question 22

Revenue is booked when ______, not when ______

Answer 22

Revenue is booked when EARNED, not when RECEIVED.

Question 23

The Unearned Revenue appears on which Financial statement?

Answer 23

Balance Sheet as a Liability.

Question 24

If the adjusting entry transferred the amount earned from the balance sheet to the income statement account, what was the transactional entry?

Answer 24

Transactional Entry

Cash (DR)

Unearned Revenue (CR)

Adjusting Entry

Unearned Revenue (DR) - (decreases the Balance Sheet liability balance by the amount earned)

Revenue (CR) - (increases the Income Statement Revenue balance to recognize the revenue earned)

Question 25

WyCo receives $45,000 in advance for a painting job on July 1. As of December 31, year-end, 32% of the work has been completed.

If the transactional entry was recorded in the Liability account, what would the adjusting entry be at year end?

Answer 25

Transactional Entry

Cash $45,000

Unearned Revenue $45,000

Since 32% of the work has been completed, WyCo has earned $14,400 ($45,000 * 32%)

Adjusting Entry

Unearned Revenue $14,400 - (reduce liability balance by the amount of revenue earned)

Revenue $14,400 - (increase the revenue account to recognize revenue earned)

Question 26

When cash payment is received or paid, a _______ entry is recorded.

Answer 26

Transactional entry.

The entry necessary to record the exchange of cash with a third party.

Question 27

LORI Co receives $48,000 on September 1st for a two-year insurance premium.

If the transactional entry was recorded in the Revenue account, what would the adjusting entry be at year end?

Answer 27

Transactional Entry

Cash $48,000

Revenue $48,000

LORI received $48,000 for a two-year policy, therefore every month they earn $2,000 ($48,000/24 months). Since the prepayment was received on September 1st, LORI rightfully earned $8,000 (4 months) in insurance revenue.

Adjusting Entry

Revenue $40,000 - (reduce the revenue balance to only reflect the amount earned)

Unearned Revenue $40,000 - (increase the liability account to recognize the portion of revenue that will be earned in the future)

Question 28

Unearned Revenue is a ____ account.

Answer 28

Liability

Question 29

There are _____ ways to record the receipt of cash before the revenue is earned.

Answer 29

Two

1. The first way is to debit Cash and credit the Unearned Revenue account.

Transactional entry

Cash (DR)

Unearned Revenue (CR)

2. The second way is to debit Cash and credit the Revenue account.

Transactional entry

Cash (DR)

Revenue (CR)