A license agreement is considered an outright sale when the licensor has
Signed a noncancelable contract
Agreed to accept a specified fee
Transferred the music rights to the licensee, who is able to use them
Fulfilled all significant duties owed the licensee
When all of these conditions are met, the earnings process is complete and revenue is recognized if there is reasonable assurance that the license fee is fully collectible.
In some cases the licensee pays a minimum guarantee, which is an amount paid in advance to a licensor for the right to sell or distribute recordings or sheet music. A minimum guarantee is first recorded by the licensor as a liability and then amortized to income as the license fee is earned. If the amount of the fee that is earned is indeterminable, then straight‐line recognition of revenue from the guarantee is required over the license period.
A licensor receives a $10,000 minimum guarantee under a five‐year license agreement. The entry to record the receipt of cash is
|Liability under license agreement||10,000|
The licensor recognizes revenue from the guarantee on a straight‐line basis. At the end of each year of the license period, the licensor records the following entry:
|Liability under license agreement||2,000|
|License fees earned (revenue)||2,000|
A licensor may charge fees for such items as free recordings beyond a certain number given away by a recording club. The amount of such ...