The Unearned Consulting Revenue account has a balance of $261,220 as of December

Question

The Unearned Consulting Revenue account has a balance of $261,220 as of December 31, 2015. On May 1, 2015 a client paid CMC $153,000 cash in advance for a 12-month consulting services contract. CMC will earn revenue evenly over this 12-month period.   This was the only prepayment received from clients during the entire 2015 fiscal year and recorded with a credit to Unearned Revenue. Of the beginningbalance in Unearned Revenue (i.e. at Jan 1 2015), 65% of the work has now been completed by year end.

What is the Adjusting Journal Entry for this? the 65% is somehow confusing me.

Explanation / Answer

The question says Ending unadjusted balance of unearned revenue account is $261220.

We have to find out the beginning balance first to make the adjusting entry.

Since only amount of unearned revenue received during 2015 is $153000, Opening balance will be calculated as follows

(A)

Ending balance

$ 261,220.00

(B)

Less: Added during the year

$ 153,000.00

(A-B)

Opening balance

$ 108,220.00

Opening balance of Unearned revenue is $108,220 and 65% of $108220 is completed by this year end along with 8 months revenue on advance collected on may 1.

Advance is collected on may 1 for 12 month’s service. 8 month’s service has been rendered till December, so revenue for 8 months will be recorded and adjusted with Unearned revenue.

Amount of Revenue to be recorded is calculated below

Earned portion

Working

Amount of earned revenue

Opening balance

$ 108,220.00

65% of 108220

(108220x65%)

$    70,343.00

Received on may 1 2015

$ 153,000.00

8 months out of 12

(153000/12x8)

$ 102,000.00

Total Adjustment

$ 172,343.00

Adjusting entry

General Journal

Debit

Credit

Unearned revenue

$ 172,343.00

                     Service Revenue

$ 172,343.00

(Revenue earned)

(A)

Ending balance

$ 261,220.00

(B)

Less: Added during the year

$ 153,000.00

(A-B)

Opening balance

$ 108,220.00

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