Question

On January 1, MU separately entered into a non-exclusive licensing agreement with KH. The licensing agreement allows KH the right to use the MU trademarked logo on aprons and chef hats for a two-year period. MU also plans to spend $1 million during the two-year period on advertising its products with the logo. The rights and terms granted by MU to KH are similar to those granted by MU in licensing agreements with various other companies. KH paid MU a one-time fee of $12,000 on January 1 at the inception of the two-year licensing period.

Section 3 Part 1 Requirement

You are asked to advise MU on how revenue related to the KH licensing agreement should be recognized during January. Suggest journal entries and disclosures, if required. Your memo should be based on current GAAP.

Answer 1

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

A company should apply the following five steps to achieve the core principle

1.Identify the contract with the customers

2. Identify the Performance obligation

3. Identify the Transaction Price

4.Allocation of transaction price to performance obligation

5.Recognize the revenue when performance obligation satisfies.

Jounal Entry for receipt of consideration

Cash A/c Debit $12,000

To Advance from Customers (KH) A/c $ 12,000

Revenue to be recognized in the reporting period on pro-rata basis.Since the Licensing agreement is for 2 years, yearly revenue recognized $ 6,000 per Calendar year.