On May 25 Mt. Hood Company received a $370 check from Douglas Fir for services to be performed in the future. The bookkeeper for Mt. Wood Company incorrectly debited Cash for $370 and credited Accounts Receivable for $370. The amounts have been posted to the ledger. To correct this entry the bookkeeper should:
A) debit Cash $370 and credit Unearned Service Revenue $370.
B) debit Accounts Receivable $370 and credit Service Revenue $370.
C) debit Accounts Receivable $370 and credit Cash $370.
D) debit Accounts Receivable $370 and credit Unearned Service Revenue $370.

Question

Quizplus · Accepted Answer

The original entry recorded the receipt of cash for a service that has not yet been performed. To correct this error, the bookkeeper should debit Accounts Receivable to remove the credit that was incorrectly posted and credit Unearned Service Revenue to record the liability for the service that has not yet been performed. This will correctly reflect the fact that the revenue should not be recognized until the service has been provided. Therefore, the correct choice is D.