Disco World began its business on November 1 and sold contracts to twelve students for dance lessons that day. The lessons cost $375 per person for a three-month period and the students are required to pay in advance. Assuming Disco World adjusts its accounts only at its December 31 year end, what entry must Disco World make to account for the services provided through that date?

a. Debit Cash and credit Dance Lessons Revenue for $3,000
b. Debit Unearned Revenue and credit Dance Lessons Revenue for $4,500
c. Debit Unearned Revenue and credit Dance Lessons Revenue for $3,000
d. Debit Dance Lessons Revenue and credit Unearned Revenue for $3,000

c. Debit Unearned Revenue and credit Dance Lessons Revenue for $3,000

Explanation:

When a fee is received in advance for a service yet to be rendered, the revenue for such fee is said to be unearned. The entries required are

Debit Cash account and Credit Unearned fees or deferred revenue.

As the service is performed and the revenue is earned, debit Unearned fees and credit revenue.

Amount of revenue earned between 1 November and 31 December

= 2/3 * 375 * 12

= $3,000

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