On January 1, 2017, Crockett Pharmaceuticals granted a 5 year license of its patent rights to a drug compound to Tubbs Company for $ 10 million. As part of the agreement, Crockett also agrees to manufacture and supply the drug to Tubbs. Crockett is the only company capable of manufacturing the drug. However, Crockett plans to continue its R& D activities and seek for ways to enhance the drug’s effectiveness. Any new discoveries are not covered by the license agreement.
Required:
1. Identify Crockett’s performance obligations in this contract.
2. Prepare Crockett’s journal entry with regard to the license agreement on January 1, 2017.
3. Assuming Crockett manufactures and delivers the drug to Tubbs evenly over the 5 year period, how much revenue related to the license is recognized in 2017?
4. Assume that other companies could manufacture the drug. Prepare the journal entry on January 1, 2017, under this scenario.