X Company prepares monthly financial statements. On January 1, a customer paid X

Question

X Company prepares monthly financial statements. On January 1, a customer paid X Company $37,500 in advance for cleaning services to be performed during the following three months, once in January, once in February, and once in March. What will be the result of the January 31 adjusting entry on X Company's financial statements?

A. a $12,500 decrease in the Retained Earnings account on the Balance Sheet
B. a balance of $12,500 in the Deferred Revenue account on the Balance Sheet
C. a $12,500 increase in the Cash account on the Balance Sheet
D. a $12,500 decrease in the Cash account on the Balance Sheet
E. a $12,500 increase in the Deferred Revenue account on the Balance Sheet
F. revenue of $12,500 reported on the Income Statement

Explanation / Answer

A. a $12,500 decrease in the Retained Earnings account on the Balance Sheet   Particulars Dr Amt Cr Amt Entry at time of payment Prepaid Cleaning Service    37,500.00 To Cash    37,500.00 Adjusting Entry on Jan 31 Cleaning Expense Dr    12,500.00 To Prepaid Cleaning Service    12,500.00 (37,500/3) Since Cleaning expense is expense it would reduce retained earnings

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