Question

Topic 1:  Abe Technologies provides maintenance service for computers and office equipment for companies throughout the Northeast. The sales manager is elated because she closed a $300,000, 3-year maintenance contract on December 29, 2016, two days before the company's year-end. “Now we will hit this year's net income target for sure,” she crowed. The customer is required to pay $100,000 on December 29 (the day the deal was closed). Two more payments of $100,000 each are also required on December 29, 2017 and 2018. Discuss the effect that this event will have on the company's financial statements.

Answer 1

In the books of Abe Technologies:

Event	Date	Account Titles	Debit	Credit
			$	$
1.	Dec 29, 2016	Cash	100,000
		Unearned Service Revenue		100,000
		To record advance received for services to be rendered

The above journal entry clearly shows that current assets of the company would increase by $ 100,000, with a commensurate increase in current liabilities.The event would not impact the net income of the current year 2016, as the service is yet to be performed during 2017, 2018 and 2019. Under the accrual method of accounting, revenue can be recognized only after it is earned.