Prince Technologies licenses its intellectual property to King Industries. Terms

Question

Prince Technologies licenses its intellectual property to King Industries. Terms of the arrangement require King to pay Prince $500,000 on April 1, 2016, when King first obtains access to Prince's intellectual property, and then to pay Prince a royalty of 4% of future sales of products that utilize that intellectual property. Prince anticipates receiving sales-based royalties of $1,000,000 during 2016 and $1,500,000/year for the years 2017–2021. Assume Prince accounts for the King license as a right of use, because Prince's actions subsequent to April 1, 2016, will affect the benefits that King receives from access to Prince's intellectual property.

Required: 1.Access the FASB Accounting Standards Codification system. 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 Prince recognize revenue from sales-based royalties associated with the King license?

2.What journal entry would Prince record on April 1, 2016, when it receives the $500,000 payment from King?

3.Assume on December 31, 2016, Prince receives $1,000,000 for all sales-based royalties earned from King in What journal entry would Prince record on December 31, 2016, to recognize any revenue that should be recognized in 2016 with respect to the King license that it has not already recognized?

4.Assume Prince accounts for the King license as a five-year right to access Prince's intellectual property from April 1, 2016, through March 31, 2021. Prince expects that its ongoing marketing efforts will affect the value of the license to King during the five-year license period. Repeat requirements 2 and 3.

Explanation / Answer

Here we follow AS named as per AS 9 Revenue Recognition.

Under the accrual basis of accounting, revenues are recorded in that period when it is realized as revenue and expenses are recorded in that period when these are incurred.Here there is no matter whether cash is received or payment has been made.

Part 1

AS per AS-9 prince recognize revenue from sales- based royalties associated with the King Licence of $ 2,500,000 in the year 2016.Here there is no matter when cash is received.

Part 2

When cash is received, cash debited and receivable will be credited to whom cash is received.

Cash Dr                                                 $ 500,000

    King Cr                                                                                              $500,000

(When cash is received)

Part 3

When revenue are recognized, accounts receivables are debited and sales will be credited.

Revenue Dr                                        $ 1,000,000

     Sales                                                                                                 $1,000,000

(when revenue is recognized)

Part 4

When it is expecting that marketing efforts will affect the value of license to King during the five year license period.

When cash is received, cash debited and receivable will be credited to whom cash is received.

Cash Dr                                                 $ 100,000

    King Cr                                                                                              $100,000

(When cash is received)

Part 3

When revenue are recognized, accounts receivables are debited and sales will be credited.

Revenue Dr                                        $ 200,000

     Sales                                                                                                 $ 200,000

(when revenue is recognized)

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