Question

Blair Biotech enters into a licensing agreement with Pang Pharmceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experince in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial. Determine the transaction price of the arrangement. Assuming that regulatory approval was granted on December 20, 2017, and that Blair received payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition. Shaw Company sells goods that cost $300,000 to Ricard Company for $410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of $40,000. The standalone selling price of the goods is $370,000. The installtion is considered a separate performance obligation and is expected to take 6 months to complete.

Prepare the journal entries (if any) to record the sale and cost of goods sold on January 2, 2017.

Answer 1

The transaction price of the licensing arrangement is $9,000,000. The journal entry for Blair would be Debit: Cash $9,000,000 and Credit: Licensing Revenue $9,000,000.

Step-by-step explanation:

To determine the transaction price of the arrangement, we need to consider the probability of regulatory approval. Blair Biotech has determined that there is a 90% chance of approval and a 10% chance of denial.

So, we can calculate the expected payment for Blair as follows: Expected payment = Probability of approval * Payment amount = 0.90 * $10,000,000 = $9,000,000.

Therefore, the transaction price of the arrangement is $9,000,000.

For the second part of the question, since the license meets the criteria for point-in-time revenue recognition, Blair would record the following journal entry on December 20, 2017:

Debit: Cash $9,000,000
Credit: Licensing Revenue $9,000,000