Johnson Bookkeeping prepares financial statements for Joes Ice Cream, Inc. for a fee. On April 1, 2006, Johnson Bookkeeping received $12,000 for one year's service in advance and recorded the following journal entry:
4/1/06 Cash 12,000 Fees Revenue 12,000.
Please note that the above journal entry is incorrect as it credited Fees Revenue instead of Unearned Fees Revenue.
1. The December 31, 2006 adjusting entry is:
A. debit Unearned Fees Revenue and credit Fees Revenue, $3,000
B. debit Fees Revenue and credit Unearned Fees Revenue, $3,000
C. debit Fees Revenue and credit Unearned Fees Revenue, $9,000
D. debit Unearned Fees Revenue and credit Fees Revenue, $9,000

Question

06-03-2020
Business

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Johnson Bookkeeping prepares financial statements for Joes Ice Cream, Inc. for a fee. On April 1, 2006, Johnson Bookkeeping received $12,000 for one year's service in advance and recorded the following journal entry:
4/1/06 Cash 12,000 Fees Revenue 12,000.
Please note that the above journal entry is incorrect as it credited Fees Revenue instead of Unearned Fees Revenue.
1. The December 31, 2006 adjusting entry is:
A. debit Unearned Fees Revenue and credit Fees Revenue, $3,000
B. debit Fees Revenue and credit Unearned Fees Revenue, $3,000
C. debit Fees Revenue and credit Unearned Fees Revenue, $9,000
D. debit Unearned Fees Revenue and credit Fees Revenue, $9,000

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Answer: The correct answer is B. debit Fees Revenue and credit Unearned Fees Revenue, $3,000

Explanation: As at 1 April 2016, the $12,00 Johnson Bookkeeping received should have been a debit to cash and credit to unearned fees revenue. Since that was a misposting and considering the fact that 9 months had already passed, the firm has to prorate the fees that has been earned by 9/12*$12,000=$9,000 (this stays in fees revenues at (31 December 2016). Remember the fees received is for a 12-month period (1 April 2016 to 31 March 2017). So, we have to report $3,000 ($12,000 minus $9,000) as unearned fees as at 31 December 2016.

However, Johnson Bookeeping would experience a spike in revenue in April 2016 management reporting due to the misposting and subsequently there would a decline, all other things held constant, in revenue. On a normal day, if the posting was accurately done to unearned fees revenue, the firm would amortize over 12 months to fees revenue, that is $1,000 every month.