Recognising Unearned revenue will increase equity--Is Schweser answer correct??

collected, revenue, correct, product, increase

Question ID#: 98033

When a firm recognizes revenue in excess of expenses on a product not covered by a warranty before cash is collected, what is the impact on the firm’s assets and liabilities, ignoring taxes?

Assets
Liabilities
A) Increase
No effect
B) Increase
Increase
C) No effect
Increase

Your answer: C was incorrect. The correct answer was A) Increase No effect

When a firm recognizes revenue before cash is collected, equity increases (retained earnings) and assets increase (accounts receivable). Liabilities would not be affected.

My solution was that when we recognise unearned revenue, we pass entry as Cash A/c Dr. ----- To Unearned Revenue A/c

So, Asset increase and Liability increase . I think that equity will remain unaffected since we will not show the unearned revenue in calculating net profit, so retained earnings(hence equity) should remain unaffected.

Can anyone confirm this?

Micholien

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发表于 2011-7-11 17:40 | 只看该作者

Okay Starbuk,
i can see where i went wrong now.

Question was not asking for ' unearned revenue" , but was saying that revenue is already earned , though cash collection is pending.
So, accounts recievable a/c dr and P&L A/c cr

It will be an unearned revenue when Cash is already collected in advance but income is not due to me., which is not the case here.
eg. When a plumber gets money in advance , for doing some work say, next month, then he will pass entry as cash a/c dr to unearned revenue.

Izen , i made you confused unnecessarily. Sory. :-) .Hope you got my mistake. I wrongly thought the cash is already recieved

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Recognising Unearned revenue will increase equity--Is Schweser answer correct??

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