Determine how Pharma should account for the R&D arrangement described above. Specifically, consider the following aspects of the arrangement:

1.) Should Pharma record a liability for future royalties owed to the PEI? If so, what amounts should be included in this liability?

2.) Should Pharma record the costs incurred in R&D activities associated with drug X as R&D expense?

For requirements 1 and 2 above, be sure to discuss the alternative accounting treatments that Pharma should consider, as well as your recommendation of the best accounting treatment under the circumstances described in the case. Include support from the Codification and any other sources you see fit.

Following are the answers:

1. To determine the appropriate accounting for the Agreement under a Research & Development...