Chapter 18, Problem 12P

To determine

Sales revenue: It is the overall income that is earned during the selling of goods and services after deducting returns. It is also referred to as Net sales revenue.

Revenue recognition: GAAP (Generally accepted accounting principles) states that under specific conditions only the revenue is recognized and accounted for.

Performance obligation: Performance obligation means a promise to transfer goods or services. A contract can have one or many obligations.

Franchise: It is the right to sell a company’s product with the specified terms and condition in a particular area.

Franchisee: It is an organization or a sole proprietor that holds a franchise for the sale of goods and services in operations.

Franchisor: It is an organization or a sole proprietor that provides a franchise for the sale of goods and services in operations.

Franchise fees: It is an amount which is paid by the franchisee to the franchisor for the life of franchise agreement.

(a)

To discuss: To discuss the alternatives to account for the franchise fees.

Given information: All the related information is provided in the question document.

To determine

(b)

To prepare: To prepare the journal entries for the initial and continuing franchise fees.

Given information: All the related information is provided in the question document.

To determine

(c)

To determine the accounting for unearned franchise fees, assuming that A has little or no involvement with the franchisee related to expert advice on employee and management training, quality control, and promotion, once the franchise opens.

Given information: All the related information is provided in the question document.