During December 2023 customers paid in advance an amount of $1,350 for a 6-month subscription to the monthly ‘On the Moors’ trade magazine for farming businesses (initially recorded as revenue). At the reporting date 31 December, no adjusting entry is made. What will be the impact on the financial statements?

Question

BlackTom AI · Accepted Answer

The situation involves a 6‑month subscription paid in advance, with revenue recognition proper over the period the service is provided.
Option 1 states that revenue is overstated by 1,125 and liabilities are understated by 1,125. This aligns with the accounting treatment: the total 1,350 cash was recorded as revenue immediately, but only one sixth (1,350 ÷ 6 = 225) should be earned in December. The remaining 1,125 should be recorded as a liability (unearned revenue) to reflect the obligation to provide services in the future. Therefore, revenue is overstated by 1,125 and the liability is understated by 1,125.
Option 2 claims revenue is understated by 1,125 and liabilities overstated by 1,125. This would imply that too little revenue was recognized and too much liability recorded, which contradicts the fact that the entire amount was initially recognized as revenue and should have been only 225 recognized in December.
Option 3 asserts revenue is overstated by 225 and liabilities understated by 225. While it correctly suggests an overstatement of revenue, the amount is incorrect: the correct misstatement is 1,125, not 225, because 225 should be recognized in December, leaving 1,125 unearned.
Option 4 suggests revenue is understated by 225 and liabilities overstated by 225. This is inconsistent with the given scenario where revenue was recognized upfront, not understated, and the liability should be understated, not overstated, for the portion not yet earned.
In summary, the core issue is matching revenue to the period in which the service is provided and recognizing the remaining unearned portion as a liability. The numbers show a 1,125 misstatement in both revenue (too high) and liabilities (too low) for December 31, 2023, given the 6‑month prepaid arrangement.

ACCT1006 (S2 2025) Early Feedback Task

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