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Chapter 18: Question E18-7 (page 1035)

(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.

Instructions

(a) Determine the transaction price of the arrangement for Blair Biotech.

(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.

Short Answer

Expert verified

The transaction price that Blair will receive is $10,000,000.

Revenue recognized by Blair will be $10,000,000.

Step by step solution

01

Meaning of Licensing Agreement

Alicensing agreementpermits one party (the licensee) to utilize gain some profit from the owner's property (the licensor). It allows a firm to a fee as a royalty for providing permission to use their copyright orpatentto another entity.

02

Transaction price and Journal entries for Blair Biotech

a. If regulatory approval will be granted then Blair Biotech will get $10,000,000 as it is the price of arrangement, So the transaction pricewill be $10,000,000.

b. Journal entries:

Date

Particulars

Debit ($)

Credit ($)

December 20, 2017

Accounts receivables a/c

10,000,000

To License revenue a/c

10,000,000

January 15, 2018

Cash a/c

10,000,000

To Accounts receivables a/c

10,000,000

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