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