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Deferred Revenue
Deferred revenues are revenues that have not yet been earned but the payments have already been collected.
- When payments are collected from customers before goods and services are provided, a liability is created called Unearned Revenue
- If some or all of the revenue has been earned at the end of the fiscal year:
- Liability is decreased by the amount earned
- Revenue is increased by the amount earned
Common Deferred Revenues
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Example: Deferred Revenues
Prepare the following adjusting journal entries, the company's fiscal year ends December 31, 2020.
- On October 1st, 2020 the company rented out a corner of its warehouse to an unrelated business at a cost of $2,000 per month. The tenants prepaid for 6-months on that date.
- Time Magazine collected $120,000 from new customers for a 12-month subscription on April 17th. By December 31, 8 magazine issues had been mailed out to these customers.
- In the month of August 2020, Starbucks sold gift cards with a total value of $50,000. An analysis on December 31st shows that half of those gift cards had been used.
Practice: Deferred Revenues
Prepare the adjusting journal entries related to the following transactions. Assume each company's fiscal year end is December 31, 2020.
On August 11th, Bob's Furniture collected $200,000 from customers for items that were backordered. On December 31st of that year, 75% of the orders had been delivered but were never recorded.
Transactions:
| Account | Debit | Credit |
|---|---|---|