[Oimie]

Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due, under the agree­ment, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows:

01/01 Prepaid royalties: $ 65,000

10/31 Royalty payment (charged to royalty expense): 110,000

12/31 Year-end credit adjustment to royalty expense: 25,000

In its December 31 balance sheet, Ott should report prepaid royalties of:

Answer: 90,000

Can someone explain how to arrive at 90,000? The way I interpreted this was that there was a debit balance of 65,000 in prepaid royalties. On October it says the royalty expense was 110,000, so you would debit royalty expense for 110,000 and credit prepaid royalties of 65,000 and credit cash for 45,000. This would leave prepaid royalty balance at 0. They didn’t mention how much they prepaid so we don’t know what the 25,000 credit adjustment would do?

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Missy]

Balance at Jan 1 was 65k, then the account was debited for 25k with the adjustment on 12/31. 65+25=90.

In October, there would be no entry to prepaid, it said they made a payment of 110k, which means that 110k was credited to cash and the problem states that the entire 110k went to expense.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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