CFA Level I · CFA Level I Exam · Analyzing Balance Sheets
A company receives €120,000 on 1 October for a 12-month software subscription starting that day and credits cash received to unearned revenue. Its financial year ends 31 December. At year-end, the amount of unearned revenue reported as a liability is closest to:
Unearned revenue at year-end is about €90,000. Three of twelve months, or €30,000, have been earned and moved to revenue, leaving nine months of service still owed to the customer. The €30,000 figure is the earned revenue, not the remaining liability.
- A€30,000
- B€90,000Correct
- C€120,000
Explanation
Three of 12 months are earned by 31 December: 120,000 × 3/12 = 30,000 recognized as revenue. The remaining 9 months: 120,000 − 30,000 = 90,000 stays as unearned revenue. €30,000 is the revenue earned, not the liability, and €120,000 ignores the service already delivered.
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