[Luna]

Becker Question –

Here is the 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

I understand how to solve this problem in other ways, but I’m really confused about the “Preliminary Year 2 royalty income 35,000”, how does the 35,000 come from? I watched the video, it said “simply math”… I really didn’t get the math :/

Can someone explain it to me? Thanks a lot!

[Spartan15]

Personally, I think the solution makes the problem more difficult than it needs to be….

The way I look at it is they give you the cash method amount (180,000) and you essentially need to get to the accrual amount for revenue.

So, you start with 180,000, Deduct decreases in A/R (5,000), and Add decreases in unearned revenue +25,000. This gives you a total of $200,000, which is the correct answer.

Sometimes they give explanations that are overly complicated and actually make it more difficult to solve. Hope this helped

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[Luna]

@Spartan15

Thank you a lot. I totally agree with you, they always make the solution more complex…
I met a similar solution of another question just looks like this, and I'm confused by the math again, so I want to figure out the math here …

[Author]

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