The following account balances are taken from the December 31, 2015, financial statements of ABZ Advertising Company.The company uses accrual basis accounting.

The following activities occurred in 2016:
1.Performed advertising services on account, $55,000.
2.Received cash payments on account, $10,400.
3.Received deposits from customers for advertising services to be performed in 2017, $2,500.
4.Made payments to suppliers on account, $5,000.
5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year.
-Use the information above to answer the following question.Which of the following is the journal entry that will be used to record activity #3?
A) Debit Cash and credit Unearned Revenue for $2,500
B) Debit Unearned Revenue and credit Advertising Revenue for $2,500
C) Debit Cash and credit Accounts Receivable for $2,500
D) Debit Unearned Revenue and credit Receivable for $2,500

Question

The following account balances are taken from the December 31, 2015, financial statements of ABZ Advertising Company.The company uses accrual basis accounting.
  
The following activities occurred in 2016:
1.Performed advertising services on account, $55,000.
2.Received cash payments on account, $10,400.
3.Received deposits from customers for advertising services to be performed in 2017, $2,500.
4.Made payments to suppliers on account, $5,000.
5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year.
-Use the information above to answer the following question.Which of the following is the journal entry that will be used to record activity #3?
A) Debit Cash and credit Unearned Revenue for $2,500 
B) Debit Unearned Revenue and credit Advertising Revenue for $2,500 
C) Debit Cash and credit Accounts Receivable for $2,500 
D) Debit Unearned Revenue and credit Receivable for $2,500

Quizplus · Accepted Answer

Activity #3 involves receiving deposits from customers for advertising services to be performed in 2017. This means that the revenue has not yet been earned, so the deposit is recorded as unearned revenue. Therefore, the journal entry would be a debit to Cash (asset) and a credit to Unearned Revenue (liability) for $2,500. This records the increase in cash and the liability, which will be adjusted when the revenue is earned in 2017.

The Following Account Balances Are Taken from the December 31