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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 December31?
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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 December31?
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2023-01-28T17:43:44+00:00
2023-01-28T17:43:44+00:00 2 Answers
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Please briefly explain why you feel this answer should be reported .
Under the accrual method, unearned revenue as of December 31 would still be $12,000, as the company has not yet performed all the services specified in the year-long contract.
Please briefly explain why you feel this answer should be reported .
Assuming that the company recognizes revenue over time as services are rendered, the full $12,000 payment received on October 1 would be initially recorded as unearned revenue on the balance sheet, as the company has not yet earned the revenue by providing services.
To determine the unearned revenue as of December 31, we need to consider the portion of the $12,000 payment that has been earned by the company as of that date. Since the contract is for a full year, we can assume that the company earns revenue evenly over the course of the year.
From October 1 to December 31, a total of 92 days have elapsed out of the 365 days in the contract period. Therefore, the company would have earned 25.2% (92/365) of the total contract revenue by December 31.
To calculate the unearned revenue as of December 31, we can multiply the total contract amount by the percentage of revenue earned up to that date:
$12,000 * 0.252 = $3,024
Therefore, as of December 31, the company would have earned $3,024 of the $12,000 contract, and the remaining $8,976 ($12,000 – $3,024) would still be recorded as unearned revenue on the balance sheet.