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n May 1, 2020, Goldenrod Co. signed a contract with a client for $144,000 cash based on which Goldenrod agrees to provide consulting services to the client for a subsequent two-year period (i.e., from May 1, 2020 through April 30, 2022). The customer will be billed annually and full payment will be received on May 5, 2022. Assume that Goldenrod has provided consulting services during 2020 and makes any necessary adjusting entries related to this transaction at the end of the fiscal year on Dec. 31.

What adjusting journal entry should Goldenrod make on December 31, 2020?
A. Dr. Cash 72,000
Cr. Service Revenue 72,000
B. Dr. Accounts Receivable 48,000
Cr. Service Revenue 48,000
C. Dr. Unearned Revenue 48,000
Cr. Service Revenue 48,000
D. Dr. Cash 90,000
Cr. Service Revenue 90,000

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Answer:

The correct answer is Option C.

Explanation:

  • As at the time the contract of $144,000 was signed for a two-year period, Goldenrod Co. would have to recognize an unearned revenue of $144,000 and debit accounts receivable for $144,000.
  • As at Dec. 31, 8-month service has been rendered. So, the company would record 8/24 x $144,000 = $48,000 by debiting unearned revenue and crediting sales revenue. This process would continue at each reporting period until the unearned revenue is fully recognized in sales revenue.
  • On May 5 when full payment is to be received, the company would debit cash $144,000 and credit accounts receivable.

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