Question

During 2014, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year. • Royalty income of $162,000 was accrued at 12/31/14 for the period July-December 2014.
• Royalty income of $180,000 was received on 3/31/15, and $234,000 on 9/30/15.

• Mercer learned from Roark that sales subject to royalty were estimated at $3,240,000 for the last half of 2015.

In its income statement for 2015, Mercer should report royalty income at

A. $432,000.
B. $414,000.
C. $558,000.
D. $576,000.

Answer 1

Answer:

D. Royalty income for the year $ 576,000

Explanation:

Computation of royalty income for the year

Royalty income for the year = Ending accrual + Royalty receipts - Opening Accrual

Ending accrual is for sales of second half

Sales of second half = $ 3,240,000

Royalty %                                10 %

Ending accrual for Royalty ( sales of second half of 2014 to be collected in March 2015)

$ 3,240,000 * 10 %                                 $ 324,000

Royalty income for the year = $ 324,000 + ($ 180,000 + $ 234,000)- $ 162,000

Royalty income for the year = $ 576,000