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Revenue and Expense Recognition

E7: Allied Company produces cow feed that is sold by Grain Foods Company. Swan receives a royalty of 15 percent of sales. Royalties are paid by Grain Foods and received by Allied semiannually on May 1 for sales made July through December of the previous year and on November 1 for sales made January through June of the current year. Royalty expense for Grain Foods and royalty income for Allied in the amount of 12,000 were accrued on December 31, 20x2. Cash in the amounts of $12,000 and $20,000 was paid and received on May 1 and November 1, 20x3, respectively. Cow feed sales during the July to December 20x3 period totaled $300,000.

1. Calculate the amount of royalty expense for Grain foods and royalty income for Allied during 20x3.
2. Record the appropriate adjusting entry made by each company on December 31, 20x3.
(please see attachment- I tried to solve the problem- could you show me where I went wrong?)


Solution Summary

The solution explains the calculation of royalty income and expense and the related adjusting entry.