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.
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
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 $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...
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