Question

On 7/31/19, Bartley Company signed a two-year software usage contract for $7,200,000 for the period 8/1/19 through 7/31/21. The customer paid the entire $7.2M on 7/31/19 and the payment is non-refundable. Bartley concluded that the ongoing cost of the obligation to deliver this software was zero.

Assume that Bartley Company had never been acquired. At 12/31/20 and for the year ended 12/31/20 what should the year end liability for deferred revenue and the revenue recognized for the year be:

                                   

12/31/20 deferred revenue            2020 recognized revenue

1. $7.2 million                                  None
2. None                                             None
3. $5.7 million                                  $1.5 million
4. $2.1 million                                  $3.6 million
5. None of the above

Answer 1

Contract period is 1st august 2019 to 31st july 2021 i.e. 2 years

Contract revenue is to be recognised in over the period it pertains to proportionatly in years 2019,2020 and 2021

	Total	2019 (1-8-2019 to 31-12-2019)	2020	2021
Contract Revenue	7,200,000	1,500,000 (7200000*5months/24months)	3,600,000 (7200000*12months/24months)	2,100,000 (7200000*7months/24months)

Therefore Deferred revenue as on 31st Dec 2020 $2.1 million and Revenue for 2020 is $3.6 million [Option C]