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

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