Paramount Event Planning Services collects fees from its customers in advance.On January 1,2015,the balance of its Unearned Revenue account had a balance of $6,000 (Cr.).During January and February,the company collected $3,000 and $1,000 as advance fees.During the two-month period,it rendered services of $6,500 related to the prepaid revenue.What is the balance in Unearned Revenue at the end of February?
A)debit balance of $6,000
B)credit balance of $6,000
C)debit balance of $3,500
D)credit balance of $3,500

Question

Quizplus · Accepted Answer

The balance in the Unearned Revenue account represents the amount of revenue received in advance but not yet earned. Thus, as the company renders the services, a portion of the unearned revenue is earned and should be recognized as revenue in the income statement.

In this case, the company had a balance of $6,000 (Cr.) in the Unearned Revenue account at the beginning of January. During January and February, it collected $3,000 and $1,000, respectively, as advance fees, which brings the total unearned revenue to $10,000 (6,000 + 3,000 + 1,000).

Then, the company rendered services of $6,500 related to the prepaid revenue during the two-month period. This means that $6,500 of the $10,000 unearned revenue has been earned, and therefore should be recognized as revenue in the income statement.

To adjust the Unearned Revenue account at the end of February, we need to subtract the earned revenue ($6,500) from the total unearned revenue ($10,000), which gives us a balance of $3,500 (Cr.). Therefore, the correct answer is D, credit balance of $3,500.

Paramount Event Planning Services Collects Fees from Its Customers in Advance.On