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Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyo...

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 Tran’s actions subsequent to April 1, 2018, 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 citation for accounting for variable consideration arising from sales-based royalties on licenses of intellectual property, and consider the relevant GAAP. When can Tran recognize revenue from sales-based royalties associated with the Lyon license?
2. What journal entry would Tran record on April 1, 2018, when it receives the $610,000 payment from Lyon?
3. Assume on December 31, 2018, Tran receives $1,110,000 for all sales-based royalties earned from Lyon in 2018. What journal entry would Tran record on December 31, 2018, to recognize any revenue that should be recognized in 2018 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, 2018, through March 31, 2023. 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.

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Answer #1

1. ASC 606 states that in case of royalties received in exchange for license of Intellectual property are recognized as revenue at later of when sales occurs or when the performance obligation to which the royalty relates has been satisfied.

2. On 04/01/2018 only the performance obligation part has been satisfied and no sales has materialized, hence the journal entry would be.

Lyon Industries Debit $ 610,000

Advance on Royalty Credit $ 610,000

3. Journal entry in the books of Trans Technologies on 12/31/2018

Advance on Royalty Debit $ 610,000

Lyon Industries Debit $ 500,000

Royalty Income Credit $ 1,100,000

4. If the license grants a right to use Trans Technologies' intellectual property as it exists at a point in time but the value of the license is expected to change, the revenue can be recognized at the point in time. The journal entries in that case would be as under:

On 04/01/2018

Lyon Industries Debit $ 610,000

Royalty Income Credit $ 610,000

On 12/31/2018

Lyon Industries Debit $ 500,000

Royalty Income Credit $ 500,000

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