[vodrldnr]

Decker Company assigns some of its patents to other enterprises under a variety of licensing agreements. In some instances advance royalties are received when the agreements are signed, and in others, royalties are remitted within sixty days after each license year-end. The following data are included in Decker’s December 31 balance sheet:

2011 2012
Royalties receivable $90,000 $85,000
Unearned royalties $60,000 $40,000

During 2012 Decker received royalty remittances of $200,000. In its income statement for the year ended December 31, 2012, Decker should report royalty income of

a. $195,000
b. $215,000
c. $220,000
d. $225,000

Answer:
(b) The requirement is to calculate the amount of royalty income to be recognized in 2012. Cash collected for royalties totaled $200,000 in 2012. However, this amount must be adjusted for changes in the related accounts, as follows:

2012 cash received $200,000
Royalties receivable 12/31/11 (90,000)
Royalties receivable 12/31/12 85,000
Unearned royalties 12/31/11 60,000
Unearned royalties 12/31/12 (40,000)
Royalty income $215,000

The beginning receivable balance ($90,000) is subtracted because that portion of the cash collected was recognized as revenue last year. The ending receivable balance ($85,000) is added because that amount is 2012 revenue, even though it has not yet been collected. The beginning balance of unearned royalties ($60,000) is added because that amount is assumed to be earned during the year. Finally, the ending balance of unearned royalties ($40,000) is subtracted since this amount was collected, but not earned as revenue, by
12/31/12.

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totally, I do not understand the problem as a whole

First, I do not even understand royalty revenue recognition criteria.

text book says that royalty revenue is recognized when earned. but in this problem what action do I need to think of “earned process”

Second, what is the logical reasoning behind to use cash received $20,000 as starting point to get the answer ???

Third , answer says ..

” beginning balance of unearned royalties ($60,000) is added because that amount is assumed to be earned during the year. Finally, the ending balance of unearned royalties ($40,000) is subtracted since this amount was collected, but not earned as revenue, by
12/31/12.” .

but How can I assume that the unearned revenue for year 1 is earned if there is no explanation about it on the problem,

plz help me …

It ain't About How Hard You Hit

[vodrldnr]

regarding year 1 unearned revenue, is it become earned because the company has other unearned royalty in year 2, implying they used up the year 1 royalty? but isn't it too much assumption because there is no mention about it at all ???

It ain't About How Hard You Hit

[Author]

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