Question

On January 1, MU separately entered into a non-exclusive licensing agreement with KH. The licensing agreement allows KH the right to use the MU trademarked logo on aprons and chef hats for a two-year period. MU also plans to spend $1 million during the two-year period on advertising its products with the logo. The rights and terms granted by MU to KH are similar to those granted by MU in licensing agreements with various other companies. KH paid MU a one-time fee of $12,000 on January 1 at the inception of the two-year licensing period.

How should MU recognize revenue related to the KH purchase of the titanium blades during January based on ASC 605 guidance? Suggest journal entries and disclosures.

How should MU recognize revenue related to the KH purchase of the titanium blades during January based on ASC 606 guidance? Suggest journal entries and disclosures.

Answer 1

ASC 605 Revenue Recognition

MU can Recognize revenue over period of agreement i.e. since agreement is for 2 years, each of two years, revenue is to be recognised for $ 6000. and advertisement costs accounted for separately

ASC 606 Revenue from Contracts with customer

An entity recognizes revenue in accordance with that core principle by applying the following steps:

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

From above Recognize revenue only when (or as) the entity satisfies a performance obligation. based on actual performance and in proportion to advertisement costs incurred, Revenue is to be recognised.