Chapter 5, Problem 5.35E

To determine

Franchise arrangement and performance obligation

The franchise involves a license to use the franchisor property, and sales of the goods and service in the name of franchisor. In the franchise transaction, the franchisor has multiple performance obligations, and the franchisor gives the selling rights to the franchisee in particular period. The franchisor should provide the start-up services to the franchisee.

The revenue recognition principle

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

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 journal entries for franchise sales in October 1, 2018, and January 15, 2019.