Check your answer
Write your response and explain your reasoning.
Willow Service is fictional. In October, an enforceable, unconditional $2,500 customer payment becomes due before any service transfers. All shown accounts open at zero. The customer later pays $1,500. Willow then completes service that qualifies for $500 revenue under the stipulated contract analysis.
Willow refunds $200 for a cancelled, wholly unperformed portion. The cancellation reduces the remaining service obligation by $200 without changing the unpaid receivable or recognized revenue. Assume a qualifying Topic 606 contract, no other transactions, and no tax, financing, or credit-loss effects. Amounts are US dollars; no rounding is needed.
Prepare the entries and ending balances for Cash, Accounts Receivable, Contract Liability, and Service Revenue. Explain why collection does not add a second contract liability. Would an invoice without the stated unconditional right and due-date facts establish the first entry?
Use ASC 606-10-45-2 on FASB to explain the timing. Attempt the task before opening the worked answer.
Compare your reasoning with the worked answer
When payment becomes due, debit Accounts Receivable $2,500 and credit Contract Liability $2,500. On collection, debit Cash $1,500 and credit Accounts Receivable $1,500. For service, debit Contract Liability $500 and credit Service Revenue $500. For the cancellation refund, debit Contract Liability $200 and credit Cash $200.
Ending Cash is $1,300; Accounts Receivable is $1,000; Contract Liability is $1,800; Service Revenue is $500. Debit and credit balances each total $2,300. Collection settles the receivable already recorded and does not add another liability. Revenue follows the stipulated service, not the due date or receipt.
A payment request alone would not establish the unconditional right and amount due. Inspect the contract before applying the first entry.