Aztec Laboratories

Aztec Laboratories, Inc. is a biotechnology company organized to develop and commercialize innovative pharmaceutical products.The company has been successful in developing a number of therapies to treat neurodegenerative diseases, and several Aztec scientists are recognized specialists for their work in this field.

In March, 2001, Tenneyson Pharmaceuticals, Inc. approached Aztec to research a therapy for Alzheimer's disease.After many months discussing the project, the companies signed a collaborative research and development contract. Significant points relating to the contract are as follows:

• Aztec Laboratories will conduct the research to develop a therapy for Alzheimer's Disease
• If the research is successful and a therapy is developed, Tenneyson Pharmaceuticals will obtain worldwide marketing rights to the therapy. Aztec will maintain all manufacturing rights to the therapy and will receive royalties on units sold.
• A project team will be responsible for directing the research. The team will be composed of three Aztec employees and two Tenneyson employees.The team will submit quarterly written research progress reports to Tenneyson and monitor the project operating budget.
• Tenneyson will make equal quarterly payments to Aztec totaling $27 million over six years.Payments are not tied to costs incurred by Aztec, and if Aztec spends less than the budgeted amounts, Tenneyson is still obligated to pay the $27 million.
• Timing and continuation of payments are dependent upon Aztec achieving eight specified technical benchmarks, which are outlined in the contract.If Aztec fails to meet a benchmark, it has an additional six months' time to meet the technical specifications. Funding will continue by Tenneyson during this six-month period.If Aztec still has not met the benchmark, it will have a second six-month period without Tenneyson funding to rectify the problem.If, after the second six-month period, Aztec is still not in compliance with the technical benchmark, the contract becomes voided.
• If the contract becomes voided, Aztec is not obligated tot refund any of the payments received to date, and Tenneyson is not obligated to pay the unpaid balance of the $27 million contract. Aztec's obligation under the contract is to perform on a best efforts basis in researching the therapy for Alzheimer's disease.

The nature of this contract is different form other research contracts entered into by Aztec.Julia Gartside, Aztec's vice president of research and development, views this contract as Tenneyson's prepayment for future worldwide marketing rights to any Alzheimer's disease therapy developed by Aztec.She indicates that Tenneyson negotiated for payments to be made on a quarterly basis in order for it to monitor the research progress while reducing its overall financial risk. Gartside further notes that Aztec's management considers the $27 million contract amount to be what Tenneyson was willing to pay for the marketing rights rather than being associated with or related to actual costs incurred. Gartside states that total development costs are anticipated to exceed Tenneyson's $27 million funding.

Required:

Discuss the alternative methods Aztec Laboratories could use to account for the contract with Tenneyson Pharmaceutical.Include in your discussion the pros and cons of each alternative considered and your recommendation as to how Aztec should account for the contract.

This is all the Assignment, no missing materials