Allen Company is hired on December 15, 2016 to perform services, beginning on December 16, 2016. Under this agreement, Allen will earn $4500 monthly and receive payment on January 15, 2017. What amount of service revenue should be recorded for the year ending December 31, 2016?

Revenue of $2,250 should be be recognized for the year ended December 31, 2016.

Explanation:

On December 31, 15 days for the month is passed and services have been provided to the customer. The revenue only for these days should be recorded according to the matching and accrual accounting concepts. As the payment will be made on January 15, so a receivable will also be recorded with the same value of revenue

Total Monthly revenue = $4,500

Service revenue recognition on December 31, 2016 = $4,500 x 0.5 = $2,250

$1,500

Explanation:

Accrual basis accounting states that revenues should be recorded during the periods that the actual earning process takes place, not necessarily when the cash is collected.

In this case, Allen signed a contract for providing services during 1 and a half months. Half month was provided during December, so it must be recognized at the year end balance:

$4,500 / 1.5 months = $3,000 per month, so half month = $1,500

the journal entries should be:

December 31, 2016

Dr Accounts receivable 1,500

    Cr Accrued service revenue 1,500

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