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This posting addresses unearned revenue at Microsoft.

1.) Explain why a company such as Microsoft would set aside some software sales revenues as "unearned"?

2.) How would you determine how much sales revenue to set aside each quarter? Is this number easy to calculate?

3.) Suppose the unearned revenue account is reduced by $100 million. Where do these dollars go? (The unearned revenue account is reduced by a debit. What account receives the offsetting credit?)

4.) Describe how contracting and regulatory incentives might influence how much revenue is set aside as unearned. How might these incentives influence when the Unearned revenue account is reduced and by how much?

5.) Why do analysts and investors pay such close attention to changes in Microsoft's Unearned revenue account?

Solution Preview

1.) Explain why a company such as Microsoft would set aside some software sales revenues as "unearned"?

Microsoft would have software sales as unearned because at the time of certain sales, the company has not yet fulfilled their obligation to provide the service, such as upgrades, fixes, and fulfilling support agreements. The customer has paid for the service, but the company has yet to provide the service. When the company performs the service, it will then be earned revenue.

2.) How would you determine how much sales revenue to set aside each quarter? Is this number easy to calculate?

I would estimate the future cost of providing services that have been ...

Solution Summary

The solution discusses why a company like Microsoft would have unearned revenue, and how to determine the amount of unearned revenue. Additional scenarios based on unearned revenue are also addressed.

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