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Nine months ago, The Allstate Corporation sold a one-year policy to a customer and recorded the receipt of the premium by crediting Unearned Revenue for $2,496. No accounting adjustments have been prepared during the nine-month period. Allstate's annual financial statements are now being prepared.

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Answer:

Journal entry recorded by the Company at the time of receipt:

Cash A/C                                                                   Dr. $2496

         To Unearned Revenue                                                        2496

(Being unexpired insurance premium recorded)

After 9 months, the following journal entry would be passed for adjustment of insurance premium expired or the revenue which has been earned by the company.

Unearned Revenue A/C (2496 × [tex]\frac{9}{12}[/tex])                        Dr. $ 1872

       To Revenue A/C                                                                  1872

(Being proportion of insurance premium expired recorded)

Unearned Revenue A/C denotes a liability. At the time of receipt of payment, the insurance company creates this liability since services are due against the receipts.

At the time of preparation of financial statements, the unearned revenue which has now been earned is recorded by debiting i.e reducing the liability balance.

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