Tran Technologies licenses its intellectual property to Lyon Industries. Terms of the arrangement require Lyon

to pay Tran $500,000 on April 1, 2016, when Lyon first obtains access to Trans intellectual property, and then

to pay Tran a royalty of 4% of future sales of products that utilize that intellectual property. Tran anticipates

receiving sales-based royalties of $1,000,000 during 2016 and $1,500,000/year for the years 20172021. Assume

Tran accounts for the Lyon license as a right of use, because Trans actions subsequent to April 1, 2016, will

affect the benefits that Lyon receives from access to Trans intellectual property.

Required:

1. Access the FASB Accounting Standards Codification at the FASB website (asc.fasb.org). Identify the specific

citation for accounting for variable consideration arising from sales-based royalties on licenses of intellectual

property, and consider the relevant GAAP. When can Tran recognize revenue from sales-based royalties associated with the Lyon license?

2. What journal entry would Tran record on April 1, 2016, when it receives the $500,000 payment from Lyon?

3. Assume on December 31, 2016, Tran receives $1,000,000 for all sales-based royalties earned from Lyon in

2016. What journal entry would Tran record on December 31, 2016, to recognize any revenue that should be

recognized in 2016 with respect to the Lyon license that it has not already recognized?

4. Assume Tran accounts for the Lyon license as a five-year right to access Trans intellectual property from

April 1, 2016, through March 31, 2021. Tran expects that its ongoing marketing efforts will affect the value of

the license to Lyon during the five-year license period. Repeat requirements 2 and 3.