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292 SECTION 1 The Role of Accounting as an Information System 3. Prepare the journal entry to record the revenue each month for the second four months of the contract. 4. Prepare the journal entry after eight months to record receipt of the $20,000 cash bonus. Tran Technologies licenses its intellectual property to Lyon Industries. Terms of the arrangement require Lyon to pay Tran $500,000 on April 1, 2016, 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 $1,000,000 during 2016 and $1,500,000/year for the years 2017–2021. Assume Tran accounts for the Lyon license as a right of use, because Tran’s actions subsequent to April 1, 2016, 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 ( asc.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, 2016, when it receives the $500,000 payment from Lyon? 3. Assume on December 31, 2016, Tran receives $1,000,000 for all sales-based royalties earned from Lyon in 2016. What journal entry would Tran record on December 31, 2016, to recognize any revenue that should be recognized in 2016 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 intellectual property from April 1, 2016, 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. In 2016, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2018. Information related to the contract is as follows: P 5–9 Variable transaction price ● LO5–3, LO5–6, LO5–7 CODE  P 5–10 Long-term contract; revenue recognition over time ● LO5–8, LO5–9 2016 2017 2018 Cost incurred during the year $2,400,000 $3,600,000 $2,200,000 Estimated costs to complete as of year-end 5,600,000 2,000,000 –0– Billings during the year 2,000,000 4,000,000 4,000,000 Cash collections during the year 1,800,000 3,600,000 4,600,000 Westgate recognizes revenue over time according to percentage of completion. Required: 1. Calculate the amount of revenue and gross profit to be recognized in each of the three years. 2. Prepare all necessary journal entries for each of the years (credit “various accounts” for construction costs 3. Prepare a partial balance sheet for 2016 and 2017 showing any items related to the contract. Indicate whether any of the amounts shown are contract assets or contract liabilities. 4. Calculate the amount of revenue and gross profit to be recognized in each of the three years assuming the following 2016 2017 2018 incurred). costs incurred and costs to complete information: Costs incurred during the year $2,400,000 $3,800,000 $3,200,000 Estimated costs to complete as of year-end 5,600,000 3,100,000 –0– 5. Calculate the amount of revenue and gross profit to be recognized in each of the three years assuming the following 2016 2017 2018 costs incurred and costs to complete information: Costs incurred during the year $2,400,000 $3,800,000 $3,900,000 Estimated costs to complete as of year-end 5,600,000 4,100,000 –0– This is a variation of Problem 5–10 modified to focus on revenue recognition upon project completion. Required: Complete the requirements of Problem 5–10 assuming that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time. P 5–11 Long-term contract; revenue recognition upon completion ● LO5–9


Spiceland_Inter_Accounting8e_Ch05
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