Question

Tran Technologies licenses its functional intellectual property to Lyon Industries. Terms of the arrangement require Lyon to pay Tran $570,000 on April 1, 2018, when Lyon first obtains access to Tran’s intellectual property, and then to pay Tran a royalty of 4% of future sales of products that utilize that intellectual property. Tran anticipates receiving sales-based royalties of $1,070,000 during 2018 and $1,570,000/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 $570,000 payment from Lyon?
3. Assume on December 31, 2018, Tran receives $1,070,000 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.

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 salesbased royalties associated with the Lyon license?

	Requirement Topic Subtopic Section Paragraph 1

What journal entry would Tran record on April 1, 2018, when it receives the $570,000 payment from Lyon? Assume on December 31, 2018, Tran receives $1,070,000 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? 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, 2021. 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Journal entry worksheet

Note: Enter debits before credits.

Record the entry for Tran when the payment is received from Lyon on April 1, 2018

	Transaction General Journal Debit Credit 1

Note: Enter debits before credits.

Record the entry from Tran to recognize any revenue that should be recognized in 2018 with respect to the Lyon license that it has not already recognized.

	Transaction General Journal Debit Credit 2

Note: Enter debits before credits.

Record the entry for Tran when the payment is received from Lyon on April 1, 2018 under the new assumption.

	Transaction General Journal Debit Credit 3

Record the entry for Tran to recognize any revenue that should be recognized in 2018 with respect to the Lyon license that it has not already recognized under the new assumption.

	Transaction General Journal Debit Credit 4

Answer 1

1:- The appropriate citation is :

FASB ASC 606-10-55-65,: revenue from contracts with customers-overall - implementation guidance and illustrations-sales-based or usage- based royalties.

Elaborating on the relevant GAAP. As per ASC 606-10-55-65 of the FASB , an entity should recognise revenue for a sales-based or utilities- based royalty promised in exchange for a license of intellectual property only when (or as) LATER of the following events occurs.

a.the subsequent sale or usage occur. b.the performance obligations to which some or all of the sales-based and usage-based royalty has been allocated has been satisfied (or partially satisfied).

Tran recognise revenue from sales-based royalty Associated with the Lyon license, based on some estimates provided by Lyon as - as per the contract with Lyon, the performance obligations of indication of future sales by Leon's will be satisfied.

2:- journal entry

Transactions	General journal	Debit	Credit
April 30	Cash	570000
	To royalty income		570000

3:- journal entry

Transactions	General journal	Debit	Credit
Dec.31	cash account	1070000
	To royalty income		107000

Journal entries to recognise any other income that should be recognised 2018 will respect to license. .

Transactions	general l journal	Debit	Credit
March 31,2/019	lyi industries	392500
	To deferred revenue account (1570000/4)		392500