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The Use of Double-Entry and Accounting SystemsSyllabus CDouble-entryAccruals and Prepayments

ACCA · Question 03 · The Use of Double-Entry and Accounting Systems

Section A

HydroGrid PLC, a public utility company, receives a $24,000 payment on 1 October 20X5 from a large industrial customer for an annual maintenance contract covering the period 1 October 20X5 to 30 September 20X6. HydroGrid's financial year ends on 31 December 20X5. What is the correct double-entry to record the adjustment needed on 31 December 20X5, assuming the full $24,000 was initially credited to Revenue?

Answer options:

A.

Debit Revenue $6,000; Credit Deferred Income (Liability) $6,000

B.

Debit Deferred Income (Liability) $18,000; Credit Revenue $18,000

C.

Debit Revenue $18,000; Credit Deferred Income (Liability) $18,000

D.

Debit Cash $24,000; Credit Revenue $24,000

How to approach this question

Calculate the monthly revenue: $24,000 / 12 = $2,000. Determine months earned by year-end: Oct, Nov, Dec = 3 months ($6,000). Determine unearned amount: 9 months = $18,000. Since the full amount was credited to revenue, you must debit revenue by $18,000 to reduce it, and credit deferred income.

Full Answer

C.Debit Revenue $18,000; Credit Deferred Income (Liability) $18,000✓ Correct
The matching principle requires revenue to be recognized when earned. By 31 December, only 3 months ($6,000) have been earned. Since $24,000 was initially recorded as revenue, an adjustment is needed to remove 9 months ($18,000) from revenue and place it in a liability account (Deferred Income).

Common mistakes

Calculating the correct amount but reversing the debit and credit.
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