any royalties in excess of the minimum will be paid annually on the contract date si 603330

On January 1, 2006, Sip Co. signed a five-year contract enabling it to use a patented manufacturing process beginning in 2006. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Sip prepaid a sum equal to two years’ minimum annual fees. In 2006, only minimum fees were incurred. The royalty prepayment should be reported in Sip’s December 31, 2006 financial statements as

1. An expense only.
2. A current asset and an expense.
3. A current asset and noncurrent asset.
4. A noncurrent asset.