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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

A company receives $6,000 for a two-year service contract on 1 October 20X5 and credits it to a deferred income account. Its year end is 31 December. What is the journal entry at 31 December 20X5 to recognise income earned?

Debit deferred income $750 and credit revenue $750. The $6,000 covers 24 months, giving $250 per month, and three months of service have been delivered by 31 December, so that portion of the liability is released to profit or loss.

  1. ADebit Deferred income $750; credit Revenue $750Correct
  2. BDebit Revenue $750; credit Deferred income $750
  3. CDebit Deferred income $1,500; credit Revenue $1,500
  4. DDebit Cash $750; credit Revenue $750

Explanation

The contract earns $6,000/24 = $250 per month. Three months have elapsed (October to December), so $750 is earned. Reduce the liability by debiting deferred income and credit revenue with $750. $1,500 would be six months' income.

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