# Unearned revenue

Q16. Unearned revenue
On December 1, 20×1, Entity A rented out one floor of the building it owns. The tenant paid $90,000 cash in advance for the six-month rent. What are the journal entries to be prepared on December 1 and 31, 20×1? A16. Unearned revenue is recognized when cash is received before service is provided. Unearned revenue is a liability account. (1) December 1, 20×1: to record the cash receipt in advance  Debit Credit Cash 90,000 Unearned rent revenue 90,000 [Note] 1. Increase in unearned rent revenue (liability): credit 2. Unearned rent revenue is a liability account, because the unearned portion of rent revenue represents an obligation to provide service in the future. (2) December 31, 20×1: to recognize rent revenue for December 20×1  Debit Credit Unearned rent revenue 15,000 Rent revenue 15,000 [Note] 1. Decrease in unearned rent revenue (liability): debit 2. Increase in rent revenue (revenue): credit 3. Six-month rent =$90,000
4. Rent revenue for December 20×1 = $90,000 x 1/6 =$15,000

(3) What is the balance of unearned rent revenue at December 31, 20×1?
1. Balance at December 1, 20×1 = $90,000 2. Revenue recognized at December 31, 20×1 =$15,000
3. Remaining balance of unearned rent revenue at December 31, 20×1
= $90,000 –$15,000 = $75,000 [Exercise] On December 1, 20×1, Entity B rented out a building for a year and received the rent for 6 months in advance. Monthly rent is$8,000.

(1) December 1, 20×1: to record the cash receipt in advance

 Debit Credit Cash 48,000 Unearned rent revenue 48,000

[Note]
Six-month rent revenue = $8,000 x 6 months =$48,000

(2) December 31, 20×1: to recognize rent revenue for December 20×1

 Debit Credit Unearned rent revenue 8,000 Rent revenue 8,000

[Note]
Rent revenue for the month of December 20×1 = $48,000 x 1/6 =$8,000

(3) What is the balance of unearned rent revenue at December 31, 20×1?
1. Balance at December 1, 20×1 = $48,000 2. Revenue recognized at December 31, 20×1 =$8,000
3. Remaining balance of unearned rent revenue at December 31, 20×1
= $48,000 –$8,000 = \$40,000