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30 November, 17:45

On December 1, Year 1, Jack's Snow Removal Company received $6,000 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial expiration of the contract impact the elements of the financial statements model?

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  1. 30 November, 18:57
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    Increase Revenue, Decrease Liability

    Explanation:

    On December 1, They have recognized a liability of $6,000

    with the journal entry:

    (DR) Cash $6,000

    (CR) Unearned Revenue $6,000

    Now, on December 31 let's assume that the expiration is an exact

    per month division of $2,000 ($6,000 / 3 months)

    The adjusting entry would be:

    (DR) Unearned Revenue $2,000

    (CR) Service Revenue $6,000

    The first effect is clear, there is an Increase in Revenue since

    the company have rendered the services.

    Now, the second effect is that the Liabilities have decreased

    because of the debit to "Unearned Revenue" which is a liability.
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