Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expense:
a. At the date the royalty agreement expired.
b. In the period incurred.
c. At the date the royalty agreement began.
d. In the period paid.
Explanation
Choice "b" is correct. Royalties paid should be reported as expense in the period incurred.
Choice "d" is incorrect. Reporting the royalties paid in the period in which they are paid would be the correct treatment under the cash basis of accounting, not accrual.
Choices "c" and "a" are incorrect. Both of these answers do not necessarily match the expense with the related revenue over an appropriate period.
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