Case 10-1 SolvGen Inc. In this case study, we deal with two separate agreements between SolvGen and Careway Pharma that are being audited for the possible sale of SolvGen to Direct Drugs, Inc. First, is the research and development agreement between SolvGen and Careway. And second, is the license and distribution agreement between the aforementioned. These agreements are both written and contractually binding and are within the scope of Multiple Deliverable Arrangements. The deliverables for the arrangements described in the case study are: a five-year research and development agreement and a five-year license and distribution agreement. For the five-year research and development agreement, SolvGen would use its best efforts to further develop proprietary instrument systems that have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. Under the license and distribution agreement, SolvGen will be paid for proprietary instrument system as it is purchased by Careway. The exclusive negotiation payment - $ 1million (paid in December 1, 2005) cannot be recognized in 2005 because it is not yet earned. The contract will start in 2006 that’s when the amount will start being spread over the 5 year life contract. SolvGen can only recognize $ 200,000 in 2006. The contract signing payment - $ 2 million (paid January 1, 2006) can be recognized over 5 year life of contract because even though they are nonrefundable milestone payments, it does not mean that SolvGen will earn all this money in 2006. The commercial launch of instrument system Version 1 - $ 5 million (paid in March 31, 2006 upon its commercialization) can be recognized once SolvGen delivers the instrument system (or provide the service) because if it has not delivered or provided the service, this amount would be unearned revenue. For the last two