Hi, I am wondering if anybody can help me with this question, after I looked at the answer provided by Wiley, I am still confused on what to do. The answer does not make any sense to me. Any help is appreciated.
Lane Company acquires copyrights from authors, paying advance royalties in some cases, and in others, paying royalties within 30 days of year-end. Lane reported royalty expense of $375,000 for the year ended December 31, 2010. The following data are included in Lane’s December 31 balance sheets:
Prepaid royalties
$60,000 (2009)
$50,000 (2010)
Royalties payable
75,000 (2009)
90,000 (2010)
During 2010 Lane made royalty payments totaling
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A. $350,000
B. $370,000
C. $380,000
D. $400,000
Here's the answer provided by wiley:
Answer A is correct. The requirement is to determine the amount of 2010 royalty payments. Royalty expense in 2010 totaled $375,000. However, this amount must be adjusted for changes in the related accounts to determine how much cash was paid for royalties.
2010 royalty expense
$375,000
Royalties payable, 12/31/09
75,000
Royalties payable, 12/31/10
(90,000)
Prepaid royalties, 12/31/09
(60,000)
Prepaid royalties, 12/31/10
50,000
2010 royalty payments
$350,000
The beginning payable balance ($75,000) is added because this amount was paid in 2010, but not included in 2010 expense (it was accrued as an expense in 2009). The ending payable balance ($90,000) is subtracted because this amount was included in 2009 expense, but was not paid in 2010 (it will be paid in 2011). The beginning balance of prepaid royalties ($60,000) is subtracted because this amount was included in 2010 expense as the prepayments expired, but it was not paid in 2010 (it was paid in 2009). Finally, the ending balance of prepaid royalties ($50,000) is added because this amount was paid in 2010, but not included in 2010 expense.
