Question

Your company is a fitness center. On December 1, 2015, a customer pays $600 for 1-year membership to the center.   When you collected the cash, you credited Unearned Revenue, a liability account.

The adjusting journal entry on December 31, 2015 is:

Answer 1

Solution:

As per the details given in the question it is observed that the company has received an annual membership fee amounting to $600 on December 1, 2015 for the period December 2015 to November 2016. On the date of receipt of membership fee the entire amount is credited to an unearned revenue account which is a liability account against which cash account is debited.

Whereas in the present case in order to prepare financial statements for year ending December 31, 2015 an adjustment entry is required to be passed recognising the proportionate revenue in the year 2015.

The part amount to be recognised as revenue till December 31, 2015 is

= $600 * 1 month / 12 months

= $50.

The adjustment entry to be passed on December 31, 2015 is as follows:

(Amounts in $)

Date	Particulars	Debit	Credit
December 31, 2015	Unearned Revenue a/c	50	-
	To Membership Revenue a/c	-	50
	[Being unearned revenue amounting to $50 has been transfered to revenue account a/c relating to the month of December 2015]

Therefore the Closing balances which will appear in Trail Balance on December 31, 2015 are as follows:

Particulars	Nature	Debit ($)	Credit ($)
Cash	Asset	600	-
Unearned Revenue	Liability	-	500
Membership Revenue	Income	-	100

Note:

1. It is assumed that the period for which membership received is from December 2015 to November 2016.