Franchise fees are properly recognized as revenue when received in cash. when a contractual agreement has been signed. aer the franchise business has begun operaons. operaons. afer the ranchiser has substanally perormed its service.
Some of the inial franchise fee may be allocated to connuing franchise fees. interest revenue on the future installments. opons to purchase the franchisee's business. all o these may reduce the amount o the inial ranchise ee that is recognized as revenue.
Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of euipment or supplies. !hen recording the inial franchise fee" the franchisor should increase revenue recognized from the inial franchise fee by the amount of the e#pected future purchases. record a poron o the inial ranchise ee as unearned revenue which will increase the selling price when the ranchisee subsequently makes the bargain purchases.
defer recognion recognion of any revenue from the inial franchise fee unl the bargain purchases are made. $one of these.
% franchise agreement grants the franchisor an opon to purchase the franchisee's franchisee's business. &t is probable that the opon will be e#ercised. e#ercised. !hen recording the inial franchise fee" the franchisor should record the enre inial ranchise ee as a deerred credit which will reduce the ranchisor's investment in the purchased outlet when the opon is exercised.
record the enre inial franchise fee as unearned revenue which will reduce the amount of cash paid when the opon is e#ercised. record the poron of the inial franchise fee which is aributable aributable to the bargain purchase opon as a reducon of the future amounts receivable from the franchisee. franchisee. $one of these.
(onnuing franchise fees should be recorded by the franchisor as revenue when earned and receivable rom the ranchisee.
as revenue when received. in accordance with the accounng procedures speci)ed in the franchise agreement. as revenue only aer the balance of the inial franchise fee has been collected.
On *anuary +" ,-+ /airy /elight" &nc. entered into a franchise agreement with a company allowing the company to do business under /airy /elight's name. /airy /elight had performed substanally all reuired services by *anuary +" ,-+" and the franchisee paid the inial franchise fee of 0+-1"--- in full on that date. 2he franchise agreement speci)es that the franchisee must pay a connuing franchise fee of 34"--- annually" of which ,-5 must be spent on adversing by /airy /elight. !hat entry should /airy /elight make on *anuary +" ,-+ to record receipt of the inial franchise fee and the connuing franchise fee for ,-+6 a.
(ash
++7"--Franchise Fee 8evenue
+-1"---
8evenue from (onnuing Franchise Fees b.
(ash
4"--++7"---
9nearned Franchise Fees c.
Cash
++7"--!!"#$$$
%ranchise %ee &evenue
!$#$$$
&evenue rom Connuing %ranchise %ees
(#)$$
*nearned %ranchise %ees
d.
0repaid %dversing (ash
!#+$$
+":-++7"---
Franchise Fee 8evenue
+-1"---
8evenue from (onnuing Franchise Fees
4"---
9nearned Franchise Fees
+":--
On %pril ;-" ,-+" /ate and /ine entered into a franchise agreement with Food 2rip &nc. to sell their products. 2he agreement provides for an inial franchise fee of 0+",--"--- which is payable as follows< 07--"--- cash to be paid upon signing the contract" and the balance in )ve eual annual installments every /ecember +" starng in ,-+. /ate and /ine signs a non=interest bearing note for the balance. 2he credit rang of the franchisee indicates that the money can be borrowed at +-5. 8ound 0> factor to two decimal places.
2he agreement further provides that the franchisee must pay a connuing franchise fee eual to 15 of its monthly gross sales. Food 2rip &nc. incurred direct cost of 017-"---" of which 0+-"--- is related to connuing services and indirect costs of 0,"---" of which +:"--- is related to connuing services. 2he franchisee started business operaons on September ," ,-+ and was able to generate sales of 041-"--- for ,-+. 2he )rst installment payment was made in due date.
%ssuming that the collectability of the note is not reasonably assured" how much is the net income of the franchisor for the )scal year ended /ecember +" ,-+6 0,1,",-? 0+7"1-: ,!()#-$
0,17"4;1
oluon/
Cash
"$$#$$$
0& ,1 2!-$#$$$x3.(45
6-$-#"$$
7otal &evenue
!#$$-#"$$
8irect cost 2"$#$$$9!($#$$$5
23($#$$$5
:ross ,ro;t
-3-#"$$
:ross ,ro;t <
-3.)"<
Cash
"$$#$$$
0& principal payment 2!-$#$$$ = !$<2-$-#"$$52(>!)5
!)"#-)(
7otal collecon
)"#-)(
:ross ,ro;t &ate
-3.)"<
&ealized :ross ,ro;t
33!#(("
&ealized :ross ,ro;t
33!#(("
?nterest income 2!$<2-$-#"$$52(>!)55
3#3(3
Connuing ranchise ee 24$#$$$ x <5
"(#$$
7otal revenue
"!"#-"(
8irect cost o connuing services
2!($#$$$5
?ndirect cost
2()#$$$5
0et income
!()#-"(
Spiral 8estaurant sold a )ne dining restaurant franchise to (ircles @otel. 2he sale agreement signed on *anuary +" ,-+ called for a 0:1"--- down payment plus three 07;"1-- annual payments Acovered by a non=interest bearing noteB represenng the value of inial franchise services rendered by Spiral restaurant. &n addion" the agreement reuired the franchisee to pay ?5 of its gross sales to the franchisor. 2he restaurant operated in *uly and its sales for the year amounted to 0?"1?,"1--. %ssuming a +15 interest rate is appropriate" round 0> factor to two decimal places.
@ow much is the franchisorCs total revenue for the year ended ,-+ income statement6 0,",??",1,)#"!#+(
0,"-,,"+,1 0,"7-;"7-1
On %ugust +" ,-+" @oliday &nc. entered into a franchise agreement with intense franchisee. 2he inial franchise fees agreed upon is 0,7?"4--" of which 07?"4-- is payable upon signing and the balance to be covered by a non=interest bearing note payable in four eual annual installments. 2he down payment is refundable within 1 days. &ntense &nc. has a high credit rang" thus" collecon of the note is reasonably assured. Out=of=pocket costs of 0+,1";;+ and 0+,";71 were incurred for direct e#penses and indirect e#penses respecvely. 0revailing market rate is 45. 8ound 0> factor to four decimal places.
On the )scal year ended September ;-" ,-+" how much revenue from franchise fee will the franchisor recognize6
0,-:"::1 0,7?"4-,$
0:;"117
On /ecember +" ,-+" Dach" &nc. authorized Eovers (ompany to operate as a franchisee for an inial franchise fee of 0?--"---. Of this amount" 0,7-"--- was received upon signing the agreement and the balance" represented by a note" is due in three annual payments of 0+,-"--- each beginning /ecember ;+" ,-+:. 2he present value on /ecember +" ,-+" for three annual payments appropriately discounted is 0,::"---. %ccording to the agreement" the non=refundable down payment represents a fair measure of the services already performed by Dach and substanal future services are sll to be rendered. (ollectability of the note is reasonably certain.
On /ecember ;+" ,-+ Statement of Financial 0osion how much should Dach report as unearned franchise fee from Eovers (ompany6 01,:"--0;?-"--07--"--,)++#$$$
On /ecember ;+" ,-+" Ecueen" &nc. authorized Er. (hun to operate as a franchisee for an inial franchise fee of 0+1-"---. Of this amount" 0?-"--- was received upon signing the agreement and the balance represented by a note due in three annual payments of 0;-"--- each beginning /ecember ;+" ,-+:. 2he present value on /ecember ;+" ,-+" for three annual payments appropriately discounted is 0,"---. %ccording to the agreement" the non= refundable down payment represents a fair measure of the services already performed by Ecueen and substanal future services are sll to be rendered. @owever" the collecbility of the note is not reasonably assured. EcueenCs /ecember ;+" ,-+" balance sheet unearned franchise fee from Er. (hunCs franchise should report as< 0+;,"--0+--"--0,()#$$$
!ynne &nc. charges an inial franchise fee of 0+";:-"---" with 0;--"--- paid when the agreement is signed and the balance in )ve annual payments. 2he present value of the future payments" discounted at +-5" is 0:+:":-:. 2he franchisee has the opon to purchase 0+:-"--- of euipment
for 3+77"---. !ynne has substanally provided all inial services reuired and collecbility of the payments is reasonably assured. 2he amount of revenue from franchise fees is 0;--"---. ,!#$+)#+$+.
0+"++:":-:. 0+";:-"---.
ount &nc. charges an inial franchise fee of 04,-"---" with 0,--"--- paid when the agreement is signed and the balance in )ve annual payments. 2he present value of the future payments" discounted at +-5" is 0171":,. 2he franchisee has the opon to purchase 0+,-"--- of euipment for 04?"---. ount has substanally provided all inial services reuired and collecbility of the payments is reasonably assured. 2he amount of revenue from franchise fees is 0,--"---. ,()!#+().
071":,. 04,-"---.
On *anuary ," ,-+" %G( (orp. entered into a franchise agreement with HD (orp. to sell their products. 2he agreement provides for an inial franchise fee of 0,":+,"1--" 0:"1-- of which is payable upon signing the contract and the balance in )ve eual annual installments payable every /ecember ;+ and starng on /ecember ;+" ,-+. %G( signs a +15 interest bearing note for the balance. 2he agreement further provides that the franchisee must pay a connuing franchise fee eual to 15 of its monthly gross sales. On October ;-" ,-+" the franchisor completed the inial services reuired in the contract at a cost of 04--"--- and incurred indirect costs of 0+:-"---. 2he franchise commenced business operaons on $ovember ;" ,-+. 2he gross sales reported to the franchisor are 04,",1- for $ovember and 0+-?":1 for /ecember. 2he )rst installment payment was made on due date. %ssume that the collecon of the note is not reasonably assured.
&n %G(Cs income statement for the year ended /ecember ;+" ,-+" how much is the income from franchise operaons6
04,":11.-0?7-":1?.,1 0:7"7-?.,1 ,4""#-$-.)
On *anuary +" ,-+" Gest Foods (orporaon granted a franchise to Er. H to operate a sales outlet. 2he franchisor is to provide inial and connuing services for an inial and connuing services for an inial fee of 0,--"--- and an annual fee of 15 based on gross sales. 2he franchisee pays ,15 of the reuired inial fee upon signing of the contract and undertakes to pay 1-5 upon substanal performance of the inial services by the franchisor and the balance" one year aer. 2he franchisor is able to provide substanally all of the inial services as of Earch +-" ,-+ at a total cost of 0+,-"---. /uring the year" franchiseeCs sales amount to 0;"---"---. @ow much revenue is recognized by the franchisor upon signing of the contract6 0,--"--0+--"--01-"--0;--"--,9$9
9sing the same data as the previous number" how much franchise fee revenue must appear on the books of the franchisor for ,-+6 0,--"--,3$#$$$
0;--"--07--"---
On /ecember ;+" ,-+" 8ice" &nc. authorized Iraf to operate as a franchise for an inial franchise fee of 0+1-"---. Of this amount" 0?-"--- was received upon signing the agreement and the balance" represented by a note" is due in three annual payments of 0;-"--- each beginning /ecember ;+" ,-+. 2he present value on /ecember ;+" ,-+ of the three annual payments appropriately discounted is 0,"---. %ccording to the agreement" the non=refundable down payment represents a fair measure of the services already performed by 8iceJ however" substanal future services are reuired of 8ice. (ollecbility of the note is reasonably certain. &n 8iceCs /ecember ;+" ,-+ balance sheet" unearned franchise fees from IrafCs franchise should be reported as 0+;,"--0+--"--04-"--,()#$$$
Kach of 0oer 0ie (o.Cs twenty=one new franchisees contracted to pay an inial franchise fee of 0;-"---. Gy /ecember ;+" ,-+" each franchisee had paid a non=refundable 0+-"--- fee and signed a note to pay 0+-"--- principal plus the market rate of interest on /ecember ;+" ,-+ and /ecember ;+" ,-+:. K#perience indicates that once franchisee will default on the addional payments. Services for the inial fee will be performed in ,-+:. !hat amount of net unearned franchise revenue would 0oer report at /ecember ;+" ,-+6 07--"--0?--"--,-!$#$$$
0?;-"---
(orny &sland &nc. sells franchises for ice cream outlets in Eetro Eanila. One contract has been signed on *anuary +1",-+?. 2he agreement calls for an inial franchise fee of 0?"---"--- to be paid by the franchise upon signing of the contract. 2he franchisor inial cost of services is 0,",1-"--- to be incurred uniformly over the ? month period L prior to the scheduled opening date of *uly +1" ,-+. $o return payments are to be made by the franchisor" although there will be connuing costs of 0+:-"--- per year for services rendered during the +- year term of contract. 2he normal return for the franchisor on connuing operaon involving franchise outlets is +-5. @ow much net income would be recognized by the franchisor on *uly +1" ,-+6 0;"1-"--0?"---"--01"1-"--,!#($#$$$
@0ote that the ,!+$#$$$ is cost not connuing ranchise ee. 7hereAs no connuing ranchise ee but there should have been in the amount o ,)$$#$$$ 2!+$#$$$>4$<5. 8eerred ranchise should be computed as 2!+$#$$$>4$<5@2!$5.
On /ecember ;+" ,-++" Ea#es &nc. signed an agreement authorizing %ntoks (ompany to operate as a franchise for an inial franchise fee of 01-"---. Of this amount" 0,-"--- was received upon signing of the agreement and the balance is due in three annual payment of 0+-"--- each" beginning /ecember ;+" ,-+,. $o future services are reuired to be performed. %ntoks (ompanyCs credit rang is such that collecon of the note is reasonably assured. 2he present value at /ecember ;+" of the three annual payments discounted at +75 Athe implicit rate for a loan of this typeB is 0,;",,-. On /ecember ;+" ,-++" Ea#es should record earned franchise fees of< 0,;",,,"3#))$
0;-"--0 -
On %pril +" ,-+ 8eebles" &nc. entered into a franchise agreement with a local business=man. 2he franchisee paid 01"--- and gave a 01-"---" :5" ;=year note payable with interest due annually on Earch ;+. 8eebles recorded the 0+,1"--- inial franchise fee as revenue on %pril +" ,-+. On /ecember ;-" ,-+" the franchisee decided not to open an outlet under 8eebles' name. 8eebles canceled the franchisee's note and refunded 07-"---" less accrued interest on the note" of the 01"--- paid on %pril +. !hat entry should 8eebles make on /ecember ;-" ,-+6 a.
Moss on 8epossessed Franchise
7-"---
(ash b.
Moss on 8epossessed Franchise
7-"--;"---
(ash c.
Moss on 8epossessed Franchise
;"--:"---
(ash $ote 8eceivable d.
&evenue rom %ranchise %ees ?nterest ?ncome
;"--1-"--!)#$$$ 3#$$$
Cash 0ote &eceivable &evenue rom &epossessed %ranchise
3(#$$$ $#$$$ 3#$$$
9se the following to answer uesons no. ,, to no. ,7
@appy *ack's 0ancake 8estaurants &nc. sells franchises for an inial fee of 0;?"--- plus operang fees of 01-- per month. 2he inial fee covers site selecon" training" computer and accounng soware" and on=site consulng and troubleshoong" as needed" over the )rst )ve years. On Earch +1" ,-+" 2im (ruise signed a franchise contract" paying the standard 0?"--- down with the balance due over 1 years with interest.
%ssuming that the inial services to be performed by @appy *ack's subseuent to the signing are substanal and that collecon of the receivable is reasonably assured" the Nournal entry reuired at signing would include a credit to< Franchise fee revenue for 0;?"---. Franchise fee revenue for 0?"---. *nearned ranchise ee revenue or ,3-#$$$.
9nearned franchise fee revenue for 0;-"---.
%ssume that at the me of signing the contract" collecon of the receivable was assured and that service obligaons were substanal. @owever" by October ,-" ,--;" substanally all connuing obligaons had been met. 2he Nournal entry reuired at October ,-" ,--; would include a< (redit to franchise fee receivable for 0,"---. (redit to franchise fee revenue for 04"---. 8ebit to unearned ranchise ee revenue or ,3-#$$$.
/ebit to unearned franchise fee revenue for 3,"---.
%ssume at the me of signing the contract" collecbility of the receivable was reasonably assured and there were no signi)cant connuing obligaons. 2he Nournal entry at signing would include a< Credit to ranchise ee revenue or ,3-#$$$.
(redit to franchise fee revenue for 04"---. (redit to unearned franchise fee revenue for 0;?"---. (redit to unearned franchise fee revenue for 0,"---.
Slater" &nc. grants a franchise to Er. Ireenwitch for an inial franchise fee of 0+"---"---. 2he agreement provides that Slater" &nc. has the opon within the one year to acuire franchiseeCs business and it seems certain that Slater" &nc. will e#ercise the opon. On Slater" &nc. books" how should the inial franchise fee be recognized6 /eferred revenue and to be amorzed. 8ealized revenue. K#traordinary revenue. 8eerred revenue and treated as a reducon rom laterAs investment when the opon is exercise.
