Question

Clement Corp., a pharmaceutical manufacturer, licensed a drug patent to Global Corp. for royalties of 5% of drug sales. Royalties are payable twice yearly on April 15 for sales from July through December of the previous year and on October 15 for January – June same-year sales. In 2014, Global paid royalties of $20,000 and $25,000 on April 15 and October 15, respectively. In response to Global’s estimate of July – December sales of the drug, Clement correctly recognized $43,000 in royalty revenue in its financial statements dated December 31, 2014. What was Global’s sales estimate for the second half of 2014?

Answer 1

Answer:

$860,000

Explanation:

If Clement correctly recognised $43,000 in royalty revenue inecember which are based on Global's estimate of July - December, $43,000 is 5% of the sales value they are estimating. So using simple proportion, we can get the sales value. (using 5% = 0.05 and 100% = 1)

1/0.05 * 43,000 = $860,000

Answer 2

Answer:

$360,000

Explanation:

Clement recognized $43,000 in royalty revenue for the whole 2014. It had already collected $25,000 in royalty revenue back in October for sales that corresponded to the first semester of 2014. Their projected sales for the second semester are lower, since they only expect to receive $18,000 (= $43,000 - $25,000) in royalties.

The $18,000 represent 5% of Global's total sales for the semester ⇒ Global's total sales for the second semester = $18,000 / 5% = $360,000