Question

Classic Artists' Services signed a contract with a maintenance service company to maintain a building that Classic will use for office purposes. The contract states that the work will begin work on February 1 and end on May 31. Classic Artists' will pay the maintenance service company $2,000 at the end of May. It accrues Maintenance Expense at the end of every month. What is the balance in the Accounts Payable account for amounts owed to the maintenance service company at the end of April?

A. Credit balance of $1,500
B. Debit balance of $1,000
C. Debit balance of $2,000
D. Credit balance of $1,000
E. None of the above

Answer 1

At the end of April, Classic Artists' will have an accumulated expense of $1,500 (for February, March, and April) in the Accounts Payable account. This represents the amount owed to the maintenance service company since payment is due at the end of May. The correct balance is a credit balance of $1,500. The answer to the question is A. Credit balance of $1,500.

Step-by-step explanation:

Since the maintenance service will begin on February 1 and end on May 31, with Classic Artists' Services accruing the expenses at the end of each month, we can calculate the balance in the Accounts Payable account at the end of April.

The total contract amount is $2,000, which will be evenly divided over the four-month period of February, March, April, and May. This leads to an accrued expense of $500 per month ($2,000 total contract / 4 months = $500 per month).

By the end of April, Classic Artists' will have accrued a total of four months of maintenance expenses, but since they have not yet made any payment (which is scheduled for the end of May), the balance in Accounts Payable for amounts owed to the maintenance company will include only February, March, and April's expenses.

As a result, the balance would be a credit balance of $1,500 (3 months x $500 = $1,500), which represents the total amount owed for services received but not yet paid for.

Therefore, the answer to the question is A. Credit balance of $1,500.