Variable transaction price
Response to the following problem:
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.