Quesnel Ltd. owns patents for number of important drugs used in the treatment of cancer. Quesnel has been unable to meet the global demand for some of its products so it licenses its patents to foreign drug manufacturers. If Quesnel's management is satisfied that a foreign producer can meet its standards for production of a drug, it signs an agreement with it. A typical agreement requires the foreign producer to pay a non-refundable fee of $1,000,000 to Quesnel at the time the contract is signed plus a royalty of $10 for each unit of the drug that is produced and sold. The royalty must be paid within 30 days of the end of each month.

Explain how Quesnel should recognize the revenue from the licensing agreement. Consider the revenue from the initial fee and the royalty separately. Use the revenue recognition criteria to support your answer.

  • CreatedFebruary 26, 2015
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