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On February 12, Year 1, VIP Publishing, Inc., purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 in Year 1. In its Year 1 income statement, what amount should VIP report as royalty expense?

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hamzatauseef

Answer:

Royalty expense = $140,000

Explanation:

The royalty expense consists of 2 components.

A fixed amount of $60,000

A variable amount as 10% of sales.

Total royalty expense attributable to income statement is

Royalty expense = 60,000 + (800,000*0.10)

Royalty expense = $140,000

This is the amount deductible in income statement.

The copyright purchase of $15,000 is a company asset, recorded in balance sheet.

Hope that helps.

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