Question

Clement Corp., a pharmaceutical manufacturer, licensed a drug patent to Global Corp. for royalties of 5% of drug sales. Royalties are payable twice yearly on April 15 for sales from July through December of the previous year and on October 15 for January – June same-year sales. In year 8, Global paid royalties of $20,000 and $25,000 on April 15 and October 15, respectively. In response to Global’s estimate of July – December sales of the drug, Clement correctly recognized $43,000 in royalty revenue in its financial statements dated December 31, year 8. What was Global’s sales estimate for the second half of year 8?

Multiple Choice

• $500,000

• $360,000

• $400,000

• Cannot be determined from information given.

Answer 1

Global’s sales estimate for the second half of year 8 is calculated as follows:

The total royalty revenue in its financial statements for the year 8 = $43,000

They had already collected $25,000 in october sale, so projetcted sale for the second half = ($43,000 - $25,000)

                                                                                                                                  = $18,000

But the amount $18,000 is 5% of the total sale of the second half.

Global's total sales for the second half = $18,000 / 5%

                                                         = $360,000

So correct answer is option (2) or $360,000