D is corrent. Royalty revenue should be recognized when earned, regardless of when the cash is collected. Royalty revenue earned from 12/1/Y2 to 5/31/Y3 is $100,000 (20% x $500,000). Since 12/31/Y2 royalties receivable was $15,000, that portion of the $100,000 was earned in year 2. Therefore, royalty revenue earned from 1/1/Y3 to 5/31/Y3 is $85,000 ($100,000 – $15,000). Royalty revenues earned from 6/1/Y3 to 11/30/Y3 were also $85,000 (20% x $425,000), and the amount earned from 12/1/Y3 to 12/31/Y3 was $14,000 (20% x $70,000). The total year 3 revenue is $184,000 as shown below. | Earned 12/1/Y2 to 5/31/Y3 (20% x $500,000) | $100,000 | | Less amt. earned 12/1/Y2 to 12/31/Y2 | 15,000 | | Earned 1/1/Y3 to 5/31/Y3 | 85,000 | | Earned 6/1/Y3 to 11/30/Y3 (20% x $425,000) | 85,000 | | Earned 12/1/Y3 to 12/31/Y3 (20% x $70,000) | 14,000 | | Amount earned in year 3 | $184,000 |
A is incorrect. Royalty revenue should be recognized when earned, regardless of when the cash is collected. Royalty revenue earned from 12/1/Y2 to 5/31/Y3 is $100,000 (20% x $500,000). Since 12/31/Y2 royalties receivable was $15,000, that portion of the $100,000 was earned in year 2 . Therefore, royalty revenue earned from 1/1/Y3 to 5/31/Y3 is $85,000 ($100,000 – $15,000). Royalty revenues earned from 6/1/Y3 to 11/30/Y3 were also $85,000 (20% x $425,000), and the amount earned from 12/1/Y3 to 12/31/Y3 was $14,000 (20% x $70,000). The total year 3 revenue is $184,000 as shown below. | Earned 12/1/Y2 to 5/31/Y3 (20% x $500,000) | $100,000 | | Less amt. earned 12/1/Y2 to 12/31/Y2 | 15,000 | | Earned 1/1/Y3 to 5/31/Y3 | 85,000 | | Earned 6/1/Y3 to 11/30/Y3 (20% x $425,000) | 85,000 | | Earned 12/1/Y3 to 12/31/Y3 (20% x $70,000) | 14,000 | | Amount earned in year 3 | $184,000
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B is incorrect. Royalty revenue should be recognized when earned, regardless of when the cash is collected. Royalty revenue earned from 12/1/Y2 to 5/31/Y3 is $100,000 (20% x $500,000). Since 12/31/Y2 royalties receivable was $15,000, that portion of the $100,000 was earned in year 2 . Therefore, royalty revenue earned from 1/1/Y3 to 5/31/Y3 is $85,000 ($100,000 – $15,000). Royalty revenues earned from 6/1/Y3 to 11/30/Y3 were also $85,000 (20% x $425,000), and the amount earned from 12/1/Y3 to 12/31/Y3 was $14,000 (20% x $70,000). The total year 3 revenue is $184,000 as shown below. | Earned 12/1/Y2 to 5/31/Y3 (20% x $500,000) | $100,000 | | Less amt. earned 12/1/Y2 to 12/31/Y2 | 15,000 | | Earned 1/1/Y3 to 5/31/Y3 | 85,000 | | Earned 6/1/Y3 to 11/30/Y3 (20% x $425,000) | 85,000 | | Earned 12/1/Y3 to 12/31/Y3 (20% x $70,000) | 14,000 | | Amount earned in year 3 | $184,000
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C is incorrect. Royalty revenue should be recognized when earned, regardless of when the cash is collected. Royalty revenue earned from 12/1/Y2 to 5/31/Y3 is $100,000 (20% x $500,000). Since 12/31/Y2 royalties receivable was $15,000, that portion of the $100,000 was earned in year 2. Therefore, royalty revenue earned from 1/1/Y3 to 5/31/Y3 is $85,000 ($100,000 – $15,000). Royalty revenues earned from 6/1/Y3 to 11/30/Y3 were also $85,000 (20% x $425,000), and the amount earned from 12/1/Y3 to 12/31/Y3 was $14,000 (20% x $70,000). The total year 3 revenue is $184,000 as shown below. | Earned 12/1/Y2 to 5/31/Y3 (20% x $500,000) | $100,000 | | Less amt. earned 12/1/Y2 to 12/31/Y2 | 15,000 | | Earned 1/1/Y3 to 5/31/Y3 | 85,000 | | Earned 6/1/Y3 to 11/30/Y3 (20% x $425,000) | 85,000 | | Earned 12/1/Y3 to 12/31/Y3 (20% x $70,000) | 14,000 | | Amount earned in year 3 | $184,000
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