Question

In year 1, Summer Corp sold x to Funny Inc. and will receive royalties of 20% of future revenues associated with x. At December 1, year 2, Summer reported royalties’ receivable of $75,000 from Funny. During year 3, Summer received royalty payments of $200,000. Funny reported revenues of $1,500,000 in year 3 from x. In its year 3 income statement, what amount should Summer report as royalty revenue?

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Answer 1

Answer:

$ 300,000

Explanation:

As per accrual basis, the revenues should be recognized as they accrue and not when they are received.

Cash receipts are irrelevant for recognition of revenue.

In the given question, Sumemr Corp receives royalty of 20% of revenues of Funny Inc.

In year 3, Funny Inc reports revenues of $ 1,500,000.

So, Summer Corp will report revenue = 1,500,000 * 20%

= $ 300,000

In case of any doubt or clarification, feel free to come back via comments.