Chapter 5, Problem 5.23P

Requirement – 1

To determine

Franchise arrangement and performance obligation

In a franchise transaction, the franchisor has multiple performance obligations. In franchise business, the franchisor gives the selling rights to the franchisee for a particular period. The franchisor provides the start-up services to the franchisee.

Therefore, the franchise involves a license to use the franchisor property and sales of the goods and service in the name of franchisor.

Installment sales method:

Under the installment sales, the revenue and costs are recognized only when the payment of cash is received from customer. Two composed components are involved in the each payment of cash, and components of sales are as follows:

• Partial recovery of the cost from sales
• Component of gross profit

These components are determined by the percentage of gross profit.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare: The necessary journal entries for Olive Branch.

Requirement – 2

To determine

To prepare: The necessary journal entries for Olive branch assume the significant uncertainty exists as on the collect of the installment receivable.

Requirement – 3

To determine

To prepare: The balance sheet of Olive Branch at the end of the 2016.