Question

Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.

a. Determine the transaction price of the arrangement.
b. Assuming that regulatory approval was granted on December 20, 2017, and that Blair received payment from Pang on January 15, 2018.
c. Prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.

Answer 1

Explanation:

a. The transaction price of the arrangement is $10,000,000

c. The journal entries are as follows:

On  December 20, 2017

Accounts Receivable A/c Dr $10,000,000

       To License revenue A/c $10,000,000

(Being the revenue is recorded)

On January 15, 2018

Cash A/c Dr  $10,000,000

    To Accounts Receivable A/c  $10,000,000

(Being the payment received is recorded)