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CPA Exam Review
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EXAMPLE – ROYALTIES RECEIVED IN ADVANCE
TAG Company receives royalties on its patents in two ways.
In some cases, advance royalties are received and
in other cases royalties are remitted within sixty days after year end.
These data are included in TAG
Company's December 31 balance sheets:
During Year 2, TAG Company received royalty remittances of $180,000.
In its income statement for the year
ended December 31, Year 2, what should TAG Company's royalty income be?
Receipts in Year 2 applied to 12/31/Year 1 receivables
Unearned royalties, 12/31/Year 2
Preliminary Year 2 royalty income
Unearned royalties, 12/31/Year 1
Receivables balance, 12/31/Year 2
Royalty income, Year 2
The net method way to calculate royalty income would be:
Plus: Reduction in unearned royalties ($70,000 - $45,000)
Less: Reduction in royalties receivable ($100,000 - $95,000)
Year 2 royalty income
The examiners frequently test journal entry concepts.
The correct journal entries for the collection and
recognizing of earned royalties are: