On October 1, A Client Pays A Company The Full $12,000 Balance Of A Year-Long Contract. Using The Accrual Method, What's The Unearned Revenue As Of December 31?
Solution Of Multiple Choice Question (MCQ) Correct Answer: D. $9,000 Understanding unearned revenue is a common challenge in accounting exams and multiple-choice questions. The key is to determine how much of the payment has been earned by the end of the accounting period and how much still represents an obligation to provide future services. Step 1: Understand the Scenario Contract value: $12,000 Contract start date: October 1 Contract length: 12 months Payment: Received in full on October 1 Accounting method: Accrual accounting Reporting date: December 31 Since the company receives the entire payment upfront, it cannot recognize all $12,000 as revenue immediately. Under the accrual method, revenue is recognized only as the company provides the agreed-upon services. Step 2: Calculate Monthly Revenue The contract covers 12 months. Monthly revenue = $12,000 ÷ 12 = $1,000 per month From October 1 through December 31 , the company has completed 3 months of service. Revenue ea...