Near the end of 20x4, ServCo received a large cash advance from a customer to pr

Question

Near the end of 20x4, ServCo received a large cash advance from a customer to provide services for the two year period starting 1/1/x5. ServCo credited the entire advance to revenue upon receipt. As a result, ServCo’s 20x4

a. income is overstated, and ending 20x4 total liabilities are understated

b. ending total liabilities are understated, but 20x4 income is not in error

c. ending total liabilities are not in error, but 20x4 net income is overstated

d. ending deferred revenue balance and 20x4 income are both understated

a. income is overstated, and ending 20x4 total liabilities are understated

b. ending total liabilities are understated, but 20x4 income is not in error

c. ending total liabilities are not in error, but 20x4 net income is overstated

d. ending deferred revenue balance and 20x4 income are both understated

Explanation / Answer

Journal Entry shoul be on advance receipt:
Cash Debit
Advance against services Credit

But entry posted is:
Cash Debit
Revenue Credit

So its result in income is overstated, and ending 20x4 total liabilities are understated.

Option a. income is overstated, and ending 20x4 total liabilities are understated is correct answer.

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