Franklin Trash Removal Company received a cash advance of $12,600 on December 1,

Question

Franklin Trash Removal Company received a cash advance of $12,600 on December 1, 2013 to provide services during the months of December, January, and February. The year-end adjustment to recognize the partial expiration of the contract will

Multiple Choice

increase liabilities by $4,200

increase equity by $4,200

increase assets by $4,200

Increase Equity by $4,200 and assets by $4,200.

Franklin Trash Removal Company received a cash advance of $12,600 on December 1, 2013 to provide services during the months of December, January, and February. The year-end adjustment to recognize the partial expiration of the contract will

Explanation / Answer

As per the Rules, any advance receipt for the services to be rendered has to be recoognised as Liablity in the books of the company. And the the service has been rendered such liability has been be t/f as amount against service provided.

Here in case,

Company received $12600 for the services to be provided for the month Dec. Jan and Feb. So the company on receipt of amount on Dec 1 will record in as a liability with the journal

Cash Account Dr. $12600

To Advance received Cr. $12600

Now at the end of the month, when the company provides the partial service i.e. 12600/3= 4200, such liability has to be removed and to be set off against service income with the journal entry on closing day of december.

Advance received Dr. $4200

To Service Provided Cr. $4200

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