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An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months' service at the beginning of each new quarter. Select the term that appropriately describes this situation from the viewpoint of the entity.
A. Prepaid expense.
B. Deferred income.
C. Accrued income.
D. Earned income.
Answer: B
The prepayment does not meet the income recognition criteria the future inflow of economic benefits is not sufficiently certain given that the entity has not done what is required to be entitled to those benefits. Thus, the amount received in advance is considered a liability deferred income) because it represents an obligation to perform a service in the future an outflow of economic benefits) arising from a past transaction.


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