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ThuyLinhLy
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Joined: 08 Oct 2010
Location: United States
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Posts: 2

Posted: 16 Mar 2011 at 18:00 \| IP Logged

Hi All,

I am going through the example on page F2-9 2011 version. I have a question about the $70K of Year 1 unearned royalties income. Can someone help?

Why is the full 12/31/Year 1 unearned royalties of $70k added to calculate Year 2 royalty income?

How do we know that all of the $70k has been earned? In the facts it does not say that the prior year unearned royalties would be earned in the next year. Is this something that must be assumed?

Homework Question:
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:

Royalties receivable
Year 1 $100,000
Year 2 $95,000
Difference($5,000)

Unearned royalties
Year 1 70,000
Year 2 45,000
Difference 25,000

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?

Solution:
    Cash   receipts                   180,000

Receipts in Year 2 applied
to 12/31/Year 1 receivables        (100,000)

Cash remaining 80,000

Unearned royalties, 12/31/Year 2     (45,000)

Preliminary Year 2 royalty income     35,000

Unearned royalties, 12/31/Year 1      70,000

Receivables balance, 12/31/Year 2     95,000

Royalty   income,   Year   2         ;  200,000

TaxProfMom
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Joined: 19 Mar 2010
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Posts: 112

Posted: 23 Mar 2011 at 01:40 \| IP Logged

Note the comment at the top: 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:

Thus either royalties are received in advance (unearned royalties), or they
are received within 60d after year end. The calculations for royalties are
similar to converting from accrual based to cash based for SCFs, except
that there are limits on the length of the receivables and unearned
revenue.

So we know all of last year's receivables were paid and that all of the
advance royalties from prior year were earned this year.

HTH -

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keenoncpa
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Joined: 16 Feb 2012
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Posted: 16 Feb 2012 at 15:06 \| IP Logged

Hi,

I did not get the logic of calculating Preliminary Year 2
royalty income 35,000

Why do we deduct unearned royalties of 45000 from the
cash ?
Can't we add directly 45,000 while estimating the royalty
income for year 2?

Please reply.

Thanks.

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