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9.1 Delayed Revenue Recognition. Software companies often bundle upgrades and technical support services with their software....

9.1 Delayed Revenue Recognition. Software companies often bundle upgrades and technical support services with their software. Assume that a software company promises to automatically deliver upgrades for two years when a customer purchases software costing $100. Describe how the software company should determine the amount of revenue to recognize at the date of sale and subsequent to the date of sale.

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In this case software companies are providing two services of selling software and providing upgrade of software for 2 years. In this case based on the performance obligation completed by software company the revenue would be recognized. The amount received from customer for purchase of software would be divided between software and upgrade service based on the proportion of standalone price of each performance obligation. In case of software sale, company would recognize the revenue immediately as the performance obligation of selling the software is completed. In case of upgrade service software company would recognize the cash received as unearned revenue which is liability for company as performance obligation is not yet completed. At the end of one year when upgrade service is provided then one year revenue related to upgrading service would be recognized. At the end of second year the remaining revenue from software upgrade would be recognized. The revenue for each year is equal that is the amount of upgrade service is divided between the two years equally.

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