Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyon to pay Tran $630,000 on April 1, 2021, when Lyon first obtains access to Tran’s intellectual property, and then in the future to pay Tran a royalty of 3% of future sales of products that utilize that intellectual property. Tran anticipates receiving sales-based royalties of $1,130,000 during 2021 and $1,630,000/year for the years 2022–2026. Assume Tran accounts for the Lyon license as a right of use, because Tran’s actions subsequent to April 1, 2021, will affect the benefits that Lyon receives from access to Tran’s intellectual property.
Required: 1. Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Identify the specific nine-digit Codification citation (XXX-XX-XX-XX) for accounting for variable consideration arising from sales-based royalties on licenses of intellectual property, and consider the relevant GAAP.
2. What journal entry would Tran record on April 1, 2021, when it receives the $630,000 payment from Lyon?
3. Assume on December 31, 2021, Tran receives $1,130,000 for all sales-based royalties from Lyon in 2021. What journal entry would Tran record on December 31, 2021, to recognize any revenue that should be recognized in 2021 with respect to the Lyon license that it has not already recognized?
4. Assume Tran accounts for the Lyon license as a five-year right to access Tran’s symbolic intellectual property from April 1, 2021, through March 31, 2026. Tran expects that its ongoing marketing efforts will affect the value of the license to Lyon during the five-year license period. Repeat requirements 2 and 3.
| 1) | ||
| FASB ASC 606–10–55–65: “Revenue from Contracts with Customers–Overall–Implementation Guidance and Illustrations–Sales-Based or Usage-Based Royaltie | ||
| 2) | ||
| Account Titles | Debit | Credit |
| Cash | $ 630,000.00 | |
| Licence Revenue | $ 630,000.00 | |
| 3) | ||
| Account Titles | Debit | Credit |
| Cash | $ 1,130,000.00 | |
| Licence Revenue | $ 1,130,000.00 | |
| 4) | ||
| Account Titles | Debit | Credit |
| Cash | $ 630,000.00 | |
| Deferred Revenue | $ 630,000.00 | |
| Cash ([9 ÷ (5 × 12)] x $630,000)+1130000 | $ 1,224,500.00 | |
| License revenue | $ 1,224,500.00 | |
| Tran provided access for nine months of 2021 | ||
Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyon...
Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyon to pay Tran $610,000 on April 1, 2018, when Lyon first obtains access to Tran’s intellectual property, and then to pay Tran a royalty of 5% of future sales of products that utilize that intellectual property. Tran anticipates receiving sales-based royalties of $1,110,000 during 2018 and $1,610,000/year for the years 2019–2021. Assume Tran accounts for the Lyon license as a right of use, because...