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

In March 20X1, Tennyson Pharmaceuticals 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 Labs will conduct the research to develop a therapy for Alzheimer's Disease.

If the research is successful and a therapy is developed, Tennyson 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 comprised of three Aztec employees and two Tennyson employees.The team will submit quarterly written research progress reports to Tennyson and monitor the project operating budget.

Tennyson 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, Tennyson is still obligated to pay the $27 million.

Timing and continuation of the payments depends on Aztec achieving eight specific technical benchmarks. If Aztec fails to meet a benchmark, it has an additional six months' time to meet the technical specifications. Funding will continue by Tennyson during this six-month window. If Aztec still has not met the benchmark, it will have a second six-month period without Tennyson 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 to refund any of the payments received to date, and Tennyson 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 from other research contracts entered into by Aztec. Julia Gartside, Aztec's vice-president of research and development, views this contract as Tennyson's prepayment for future worldwide marketing rights to any Alzheimer's Disease therapy developed by Aztec. She indicates that Tennyson 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 to be what Tennyson 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 Tennyson's $27 million of funding.

Required

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

Aztec Laboratories Aztec Laboratories 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 of their scientists are recognized specialists for their work in this field. In March 20X1, Tennyson Pharmaceuticals 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 Labs will conduct the research to develop a therapy for Alzheimer's Disease. If the research is successful and a therapy is developed, Tennyson 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 comprised of three Aztec employees and two Tennyson employees. The team will submit quarterly written research progress reports to Tennyson and monitor the project operating budget. Tennyson 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, Tennyson is still obligated to pay the $27 million. Timing and continuation of the payments depends on Aztec achieving eight specific technical benchmarks. If Aztec fails to meet a benchmark, it has an additional six months' time to meet the technical specifications. Funding will continue by Tennyson during this six-month window. If Aztec still has not met the benchmark, it will have a second sixmonth period without Tennyson funding to rectify the problem. If after the second sixmonth period Aztec is still not in compliance with the technical benchmark, the contract becomes voided. If the contract becomes voided, Aztec is not obligated to refund any of the payments received to date, and Tennyson 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 from other research contracts entered into by Aztec. Julia Gartside, Aztec's vice-president of research and development, views this contract as Tennyson's prepayment for future worldwide marketing rights to any Alzheimer's Disease therapy developed by Aztec. She indicates that Tennyson 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 to be what Tennyson 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 Tennyson's $27 million of funding. Required Discuss the alternative methods Aztec Laboratories could use to account for the contract with Tennyson. Include in your discussion the pros and cons of each alternative considered and your recommendation as to how Aztec should account for the contract