A company performs 20 days work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry includes a $4,000 credit to unearned revenue.

Question

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The correct adjusting entry should include a $4,000 debit to Unearned Revenue (decreasing the liability) and a $4,000 credit to Revenue (recognizing the earned portion of the contract). The calculation is based on the proportion of work completed (20 days out of 30 days) on the $6,000 contract, which equals $4,000 (20/30 * $6,000).

A Company Performs 20 Days Work on a 30-Day Contract