On September 1, Peterson Maintenance Company contracted to provide monthly maintenance services for the next eight months at a rate of $2600 per month. The client paid Peterson $20,800 on September 1. Assuming Peterson records deferred revenues using the alternative treatment, what would be the entry on September 1?

Question

Business

Miya Pugh

16 January, 16:38

On September 1, Peterson Maintenance Company contracted to provide monthly maintenance services for the next eight months at a rate of $2600 per month. The client paid Peterson $20,800 on September 1. Assuming Peterson records deferred revenues using the alternative treatment, what would be the entry on September 1?

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Milton Massey · Answer 1

See explanation section

Explanation:

The journal entry to record the transaction of receiving advance cash for service provided in the following months is as follows:

September 1 Cash Debit $20,800

Unearned Service revenue Credit $20,800

As the client paid full in advance, cash account is debit. According to the revenue recognition principle, as the service is yet to perform, therefore, service revenue is not credit. Instead, Unearned Service revenue (A liability) arises.