Detailed Answer
Answer (A) is correct. Revenues should be recognized when (1) realized or realizable and (2) earned. Because the software firm has not substantially fulfilled its obligation, the earning process has not been substantially completed in Year 1. Accordingly, a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits, that is, to deliver the software or to refund the customer’s money. Thus, a liability for $100,000 and revenue of $0 should be recognized for Year 1.