[Trying]

I’m feeling crazy that I can’t figure this one out. Ironically, the first time I did the problem I got it correct, and now reviewing it, I’m blank :/

Why are the JE not this:

Upon signing:
PPE 65
Cash 65

10/31: Payment of Royalties
Royalty expense 110
PPE 65
Cash 45
10/31: Prepayment of Next Year’s Royalties
PPE 65
Cash 65

12/31: Adjustment credit to Royalty Expense
Debit ??
Royalty Expense 25

I’m trying to do this with a T Account and I’m just getting confused…

Ninja #3556

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:

Date Amount
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

A. $25,000
B. $40,000
C. $85,000
D. $90,000

The balance in Prepaid Royalties would be $90,000 ($65,000 + $25,000) as a result of the following journal entries:

On 10/31, the following journal entry was recorded:

Royalty Expense 110,000
Cash 110,000
On 12/31, the following journal entry was recorded:

Prepaid Royalty Expense 25,000
Royalty Expense 25,000