Cobb Company sells appliance service contracts for two-year period. Past experience, of the dollars spent for repairs on service contracts, 40% is incurred evenly during the 1st contract year, 60% during the 2nd contract year. Receipts from service contracts sales that were credited to unearned revenue ended 12/31/07:

2006 = $500

2007 = $600

Requirement: Balance of unearned revenue 12/31/07?

Answer: $630 = (500*60%/2)+(600*40%/2)+(600*60%)

Question: Is there anyone who can explain this solution in a simple way? Wiley's explanation is complicated.  Thanks.

I am not sure how Wiley explains it but here is my 2 cents:

The first thing you have to do is understand that when the question states that revenue is earned evenly throughout the year the examiners are saying that the same amount is earned monthly.  For example if they say you earned 1,200 evenly throughout the year you can assume that you earned 100 a month for 12 months.  Understanding that is key in my opinion to getting this question right.

Now to your question, the unearned revenue at 12/31/2007 should be calculated as follows:

500 * 60% = 300 - this is the total amount of unearned revenue for the year

300/2 = 150 - this is because the revenue was earned evenly throughout the year

600 * 40% = 240 - same explanation as above

240/2 = 120 - same explanation as above

600 * 60% = 360 - because none of this revenue is earned in 2007 it will be earned evenly in 2008

Total unearned revenue = 150+120+360 = 630

Hope this helps.