IT Technology enters into a contract with the federal government to create a system for the price of $8 million. IT receives $3 million when the contract is signed and the other $5 million upon completion of the project. The government maintains control of the system during the creation process. IT estimates that 15,000 labor hours will be required to complete the product. During the current year 7,000 labor hours are used and during the following year, the remaining 8,000 hours were used. What is the journal entry at inception of the project?
A) Debit to Cash; Credit to Sales Revenue
B) Debit to Cash; Credit to Unearned Revenue
C) Debit to Cash; Government Contracts
D) Debit to Cash; Credit to Accounts Receivable

Question

Quizplus · Accepted Answer

The $3 million received at the inception of the contract is considered unearned revenue because the service has not yet been fully provided.

IT Technology Enters into a Contract with the Federal Government