Part I: Unearned Revenues Because the company offers service contracts to all of its customers, unearned revenue is a significant element of CM 2 's current liabilities. As indicated in the 2010 forecasted financial statements (see Case 1 Excel file), the projected amount of unearned revenue on the forecasted balance sheet is $105,000. This amount is an increase over the amount of unearned revenue in 2009, which was $70,800. This increase seems reasonable but you wonder whether it should be even higher, given the increased sales expected for CM 2 products. Knepp and Lopez provide the following information about the service contracts expected to be outstanding at the end of 2010 based on recent trends. Customers prepay service contracts regardless of the length of the period of service. Contract Price Service Contract 1, dated October 1, 2010; service for six months $42,000 Service Contract 2, dated November 1, 2010; service for one year 75,000 Service Contract 3, dated December 1, 2010; service for one year 90,000 Instructions Based on the information provided, determine the amount of unearned revenue that CM 2 should report on the balance sheet at the end of 2010. Assume that the company will provide services evenly over the contract period. Based on your calculation in (a), prepare the journal entry to record the correct amount of unearned revenue at the end of 2010. Write a memo explaining to Conner and Martin your analysis and the effect of the journal entry prepared in part (b) on the financial statements. Discuss why your numbers are more indicative of the actual obligation of CM 2.