Which of the following pre-payments requires an adjusting entry at the end of the year to recognize revenue earned?

• A. Prepaid insurance for the upcoming year
• B. Payment of accounts payable before the due date
• C. Unearned revenue received in advance for services partially performed during the year
• D. Unearned revenue received in advance for services to be performed next year

Answer: (C)

Verified step by step guidance

1. Understand the concept of unearned revenue: Unearned revenue refers to money received by a company for services or goods that have not yet been provided. It is recorded as a liability because the company has an obligation to deliver the service or product in the future.
2. Identify the scenario requiring adjustment: In this problem, the focus is on unearned revenue received in advance for services partially performed during the year. This means some of the services have been provided, and the company needs to recognize the revenue earned for those services.
3. Determine the adjusting entry: At the end of the year, an adjusting entry is required to transfer the portion of unearned revenue that corresponds to the services performed from the liability account (Unearned Revenue) to the revenue account (Service Revenue).
4. Calculate the amount to adjust: To determine the amount to adjust, calculate the portion of the services that have been performed during the year. This may involve dividing the total unearned revenue by the service period and multiplying by the number of months or days the service was provided.
5. Record the adjusting entry: The journal entry will involve debiting the Unearned Revenue account to reduce the liability and crediting the Service Revenue account to recognize the earned revenue. The formula for the journal entry can be expressed as: $\mathrm{Debit}\left(\mathrm{Unearned\; Revenue}\right)=\mathrm{Earned\; Revenue}$.