Question

three programmers at feenix computer storage, incorporated, write an operating systems control manual for hill-mcgraw publishing, incorporated, for which feenix receives royalties equal to 12% of net sales. royalties are payable annually on february 1 for sales the previous year. the editor indicated to feenix on december 31, 2024, that book sales subject to royalties for the year just ended are expected to be $300,000. accordingly, feenix accrued royalty revenue of $36,000 at december 31 and received royalties of $36,500 on february 1, 2025. what adjustments, if any, should be made to retained earnings or to the 2024 financial statements?

Answer 1

Feenix Computer Storage, Incorporated needs to adjust their 2024 financial statements by adding an additional $500 to the royalty revenue, and the accounts receivable to correct the discrepancy between the accrued royalty amount and the actual royalties received.

Step-by-step explanation:

In the scenario described, Feenix Computer Storage, Incorporated is expected to make necessary adjustments in the financial statements due to a discrepancy in royalty revenue accrual. After having estimated royalties to be $36,000 for the sales year ended on December 31, 2024, an accrued royalty revenue was recognized accordingly. However, upon receiving $36,500 on February 1, 2025, which is higher than the accrued amount, an adjustment becomes necessary.

To correct the discrepancy, retained earnings or the 2024 financial statements need to reflect an additional $500 ($36,500 received - $36,000 accrued) in royalty revenue.

The royalty revenue on the income statement for 2024 should be increased by $500, and the same amount should be added to the balance sheet under accounts receivable as of December 31, 2024. Consequently, upon receipt of the actual royalties, the accounts receivable will be debited by $36,500 and the cash account will be credited by the same amount, thereby balancing the accounts.

These adjustments ensure that Feenix's financial statements accurately reflect their royalty income in accordance with the accrual basis of accounting. This method requires that revenues be recognized when earned, regardless of when the cash is received, and expenses be recognized when incurred.