Practice prompt · Q:transactions-to-statements/deferral-interpretation-001

Interpret unchanged trial-balance totals after deferral adjustments

Formative check on the account, income, and analytical effects of cash first period end adjustments.

Updated Sep 10, 2026 Review due Nov 6, 2026

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At July 31, a company's unadjusted trial balance has $17,000 Cash, $12,000 Prepaid Insurance, a $9,000 Customer Advance, and $20,000 Owners' Equity. No other accounts have balances. The insurance was paid on July 1 for twelve months of even coverage. The advance was received that day for three equal service milestones; one has been completed and accepted in July.

The company records $1,000 of insurance consumption and $3,000 of customer performance. No other revenue, expense, or closing entries occur in this task. Both the unadjusted and adjusted trial balances total $29,000 on each side. Which interpretation is correct?

Choose the best answer. A The adjustments had no reporting effect because total debits and credits were $29,000 before and after. B The insurance adjustment decreases an asset and increases expense; the performance adjustment decreases a liability and increases revenue; together they increase July income by $2,000. C The $9,000 cash receipt is July revenue because the company can spend the cash even though two service milestones remain. D Deferral means the July 1 cash entries should be deleted and only the July 31 expense and revenue entries retained.

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Answer: B

One month of insurance moves $1,000 from Prepaid Insurance to Insurance Expense. One completed milestone moves $3,000 from Customer Advance to Service Revenue. Because each adjustment transfers an amount between accounts on the same normal side, the $29,000 debit and credit totals do not change. Account composition changes and July income increases $2,000.