On December 1, Year 1, Jack's Snow Removal Company received $12,000 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?

Question

Business

Paige Hayden

23 February, 00:32

On December 1, Year 1, Jack's Snow Removal Company received $12,000 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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Answers (1)

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Nola Rush · Answer 1

The answer is: equity will increase by $4,000

Explanation:

Since only one third of the contract has been fulfilled, then one third of the money received ($12,000 x 1/3) should be recognized as revenue. A revenue increase will result in a net earnings increase, which will result in an adjustment of the balance sheet's equity.