Question

6) Unearned revenue is classified as

a. an asset account.

b.   a revenue account.

c. a contra-revenue account.

d.   a liability account.

7) Which of the following would not result in unearned revenue?

a. Rent collected in advance from tenants

b.   Services performed on account

c. Sale of season tickets to football games

d.   Sale of two-year magazine subscriptions

8) If an adjusting entry is not made for an accrued expense,

a. expenses will be overstated.

b.   liabilities will be understated.

c. net income will be understated.

d.   owner’s equity will be understated.

Answer 1

• Question 6

The correct answer = Option ‘d’: Unearned Revenue is classified as ‘a liability account’. It is because of this that it is shown under “Current Liabilities” heading on Balance Sheet. This account has a ‘credit balance’.

Unearned revenue is not:
>an asset account, because of its nature and credit normal balance.
>a revenue account, because it consists of amount of revenues not earned yet.
>a contra revenue account, because to be so, it should have a debit balance.

• Question 7

The correct answer is Option ‘b’: Services performed on account would NOT result in Unearned revenue.

This is because when services are performed, the revenue is deemed to be earned even though the cash is not yet received.

• Question 8

The correct answer is Option ‘b’: Liabilities will be understated if accrued expenses adjustment entry is not made. This is because when adjusting entry for accrued expense is made, Expense account is debited and respective ‘expense payable’, a liability account, is credited. If no entry is made, liability amount on balance sheet will be understated.

If accrued expenses are not recorded, expenses will be understated (That’s why Option ‘a’ is wrong), hence Net Income will be overstated (That’s why Option ‘c’ is wrong) and therefore Owner’s Equity will be overstated (That’s why Option ‘d’ is wrong).