Question

Zack developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Spurlock paid a licensing fee of $60,000 for a copy of the software. Although Spurlock can use the software as long as it wants, Zack expects that Spurlock will use the software for approximately 5 years. Zack does not anticipate any further interaction with Spurlock following transfer of the license. How much revenue should Zack recognize in the first year of the contract?

Answer 1

Zack should recognize the full $60,000 as revenue in the first year of the contract because the performance obligation is fulfilled when Spurlock receives the software license with rights to use it indefinitely.

Step-by-step explanation:

Zack developed software that helps farmers to improve their farming techniques. He sold a license to Spurlock, who will use the software for an estimated 5 years for a one-time fee of $60,000. According to the revenue recognition principle in accounting, Zack should recognize the revenue when the performance obligation is satisfied, which in this case is the transfer of the software license. Since no further interactions are expected post-transfer, and the user has the right to use the software indefinitely, Zack should recognize the full $60,000 as revenue in the first year of the contract.