Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 5.41BE
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.
To discuss: The timing of revenue recognition in franchise sales.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Please provide a solution in good accounting form.
What is the unearned franchise revenue?
a. 879 080
b. 512 500
ABC sells franchise arrangement throughout La Trinidad and Itogon. Under a franchise agreement, ABC receives 1,000,000 in exchange for satisfying the following separate performance obligations: franchisees have a ten-year right to operate as an ABC retail establishment once it started its operation; franchisees receive an ABC building and necessary equipment; franchisees receive initial training and certification as an ABC retail. The 1,000,000 is payable with a down payment of P500,000 on August 1, 2021 with the balance will be payable in five equal annual payments with an interest of 10% starting January 1, 2022. The stand-alone selling price of the initial training and certification is P100,000 and P400,000 for the building and equipment. ABC estimates that the stand-alone selling price of the ten-year right to operate as a franchise using the residual approach. ABC received P500,000 on August 1, 2021 from DDD, which represent the collection from the training, building and…
Sr. Juan Inc. a franchisor, entered into a franchise agreement with Mang Pedro, franchisee, on March 31, 20x1. The total franchise fee is P500,000 of which P100,000 is payable upon signing and the balance was represented by a 10% interest bearing note payable in four equal annual installments. The down payment is non-refundable and represent a fair measure of service already performed.
The five year franchise license provides Mang Pedro the right to use because the license to which Mang Pedro has rights will not change over the term of the license.
On April 10, 20x1, Sr. Juan transfers the rights and provided all the necessary services required in the contract. Mang Pedro started its operation on April 12, 20x1.
Case 1: What is the total revenue to be recorded on July 1, 20x1?
Case 2: Which of the following statement is correct?
a. A credit to interest income amounting to P13,333
b. A credit to Franchise Revenue of P100,000 on April 10, 20x1
c. A credit to Franchise Revenue…
Chapter 5 Solutions
Intermediate Accounting
Ch. 5 - What are the five key steps a company follows to...Ch. 5 - What indicators suggest that a performance...Ch. 5 - What criteria determine whether a company can...Ch. 5 - We recognize service revenue either at one point...Ch. 5 - What characteristics make a good or service a...Ch. 5 - Prob. 5.6QCh. 5 - What must a contract include for the contract to...Ch. 5 - How might the definition of probable affect...Ch. 5 - When a contract includes an option to buy...Ch. 5 - Prob. 5.10Q
Ch. 5 - Prob. 5.11QCh. 5 - Is a customers right to return merchandise a...Ch. 5 - Prob. 5.13QCh. 5 - Under what circumstances should sellers consider...Ch. 5 - When should a seller view a payment to its...Ch. 5 - What are three methods for estimating stand-alone...Ch. 5 - When is revenue recognized with respect to...Ch. 5 - In a franchise arrangement, what are a franchisors...Ch. 5 - When does a company typically recognize revenue...Ch. 5 - Prob. 5.20QCh. 5 - Prob. 5.21QCh. 5 - Prob. 5.22QCh. 5 - Must bad debt expense be reported on its own line...Ch. 5 - Explain the difference between contract assets,...Ch. 5 - Explain how to account for revenue on a long-term...Ch. 5 - Prob. 5.26QCh. 5 - Prob. 5.27QCh. 5 - What are the two general criteria that must be...Ch. 5 - Explain why, in most cases, a seller recognizes...Ch. 5 - Revenue recognition for most installment sales...Ch. 5 - Prob. 5.31QCh. 5 - How does a company report deferred gross profit...Ch. 5 - Prob. 5.33QCh. 5 - Briefly describe the guidelines for recognizing...Ch. 5 - Prob. 5.35QCh. 5 - Briefly describe the guidelines provided by GAAP...Ch. 5 - Revenue recognition at a point in time LO52 On...Ch. 5 - Timing of revenue recognition LO53 Estate...Ch. 5 - Prob. 5.3BECh. 5 - Allocating the transaction price LO54 Sarjit...Ch. 5 - Existence of a contract LO5-5 Tulane Tires wrote...Ch. 5 - Prob. 5.6BECh. 5 - Prob. 5.7BECh. 5 - Performance obligations; warranties LO55 Vroom...Ch. 5 - Prob. 5.9BECh. 5 - Prob. 5.10BECh. 5 - Performance obligations; construction LO55...Ch. 5 - Prob. 5.12BECh. 5 - Prob. 5.13BECh. 5 - Variable consideration LO56 Leo Consulting enters...Ch. 5 - Variable consideration LO56 In January 2018,...Ch. 5 - Prob. 5.16BECh. 5 - Prob. 5.17BECh. 5 - Payment s by the seller to the customer LO56...Ch. 5 - Estimating stand-alone selling prices: adjusted...Ch. 5 - Estimating stand-alone selling prices: expected...Ch. 5 - Estimating stand-alone selling prices; residual...Ch. 5 - Timing of revenue recognition; licenses LO57 Saar...Ch. 5 - Prob. 5.23BECh. 5 - Prob. 5.24BECh. 5 - Timing of revenue recognition; franchises LO57...Ch. 5 - Timing of revenue recognition; bill-and-hold LO57...Ch. 5 - Prob. 5.27BECh. 5 - Prob. 5.28BECh. 5 - Contract assets and contract liabilities LO58...Ch. 5 - Prob. 5.30BECh. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Prob. 5.32BECh. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognition; loss on...Ch. 5 - Installment sales method On July 1, 2018, Apache...Ch. 5 - Prob. 5.36BECh. 5 - Cost recovery method Refer to the situation...Ch. 5 - Prob. 5.38BECh. 5 - Prob. 5.39BECh. 5 - Revenue recognition; software contracts under IFRS...Ch. 5 - Prob. 5.41BECh. 5 - Prob. 5.1ECh. 5 - Prob. 5.2ECh. 5 - Allocating transaction price LO54 Video Planet...Ch. 5 - Prob. 5.4ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.8ECh. 5 - Prob. 5.9ECh. 5 - Variable considerationmost likely amount; change...Ch. 5 - Variable considerationexpected value; change in...Ch. 5 - Prob. 5.12ECh. 5 - Approaches for estimating stand-alone selling...Ch. 5 - FASB codification research LO56, LO57 Access the...Ch. 5 - Franchises; residual method LO56, LO57 Monitor...Ch. 5 - FASB codification research LO58 Access the FASB...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Income (loss) recognition; Long-term contract;...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Installment sales method Charter Corporation,...Ch. 5 - Installment sales method; journal entries [This is...Ch. 5 - Installment sales; alternative recognition methods...Ch. 5 - Journal entries; point of delivery, installment...Ch. 5 - Prob. 5.27ECh. 5 - Prob. 5.28ECh. 5 - Prob. 5.29ECh. 5 - Prob. 5.30ECh. 5 - Prob. 5.31ECh. 5 - Prob. 5.32ECh. 5 - Prob. 5.33ECh. 5 - Prob. 5.34ECh. 5 - Prob. 5.35ECh. 5 - Prob. 5.1PCh. 5 - Prob. 5.2PCh. 5 - Prob. 5.3PCh. 5 - Prob. 5.4PCh. 5 - Prob. 5.5PCh. 5 - Variable consideration; change of estimate LO53,...Ch. 5 - Prob. 5.7PCh. 5 - Prob. 5.8PCh. 5 - Prob. 5.9PCh. 5 - Long-term contract; revenue recognition over time ...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognized over time;...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Income statement presentation; installment sales...Ch. 5 - Prob. 5.15PCh. 5 - Installment sales; alternative recognition methods...Ch. 5 - Installment sales and cost recovery methods...Ch. 5 - Prob. 5.18PCh. 5 - Franchise sales; installment sales method Olive...Ch. 5 - Prob. 5.1BYPCh. 5 - Judgment Case 52 Satisfaction of performance...Ch. 5 - Judgment Case 53 Satisfaction of performance...Ch. 5 - Prob. 5.4BYPCh. 5 - Prob. 5.5BYPCh. 5 - Prob. 5.6BYPCh. 5 - Prob. 5.8BYPCh. 5 - Prob. 5.9BYPCh. 5 - Prob. 5.10BYPCh. 5 - Prob. 5.11BYPCh. 5 - Prob. 5.12BYPCh. 5 - Prob. 5.13BYPCh. 5 - Prob. 5.14BYPCh. 5 - Prob. 5.15BYPCh. 5 - Prob. 5.16BYPCh. 5 - Prob. 5.19BYPCh. 5 - Prob. 1CCTC
Knowledge Booster
Similar questions
- How much will be the total revenue to be recorded during 2021?arrow_forwardAn entity enters a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity's trade name and sell the entity's product for ten years. The entity also promises to provide the equipment necessary to operate a franchise outlet. In exchange for granting the license, the entity receives a sales-based royalty of 5% of the customer's monthly sales. What is/are the performance obligation/s to be identified by the franchisor? a.Franchise license only b.Equipment license only c.Franchise license and equipment d.Right to use entity's trade name and sell the entity's productarrow_forwardABC Company sells franchise arrangements throughout Luzon and Visayas. Under a franchise agreement, ABC receives P600,000 in exchange for satisfying the following separate performance obligations: Franchisees have a five-year right to operate as an ABC's retail establishment in an exclusive sales territory Franchisees receive initial training and certification, and . Franchisees receive an ABC building and necessary equipment. ● The stand-alone selling price of the initial training and certification is P15,000, and P450,000 for the building and equipment. ABC estimates the stand-alone selling price of the five-year right to operate as an ABC establishment using the residual approach. ABC received P75,000 on July 1, 2022, from a customer and accepted a note receivable for the rest of the franchise price. ABC will construct and equip the customer's building and train and certify the customer by September 1, and the customer's five-year right to operate as an ABC establishment will…arrow_forward
- (Franchise Revenue) Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions.1. The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $100,000 zero-interest-bearing note is payable with a $20,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of $20,000, each discounted at 10%, is $75,816.2. All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise.3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business,(b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e)…arrow_forwardKami, Inc. charges an initial franchise fee of P500,000 for the right to operate to operate as a franchise of Kami. Of this amount, P100,000 is payable when the agreement was signed and the balance is payable in a noninterest bearing note in five annual payments of P80,000 each. In return for the initial franchise fee, the franchisor will help locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide the bookkeeping services. The credit rating of the franchisee indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P80,000 each discounted at 8% is P319,416.80. The discount represents the interest revenue to be accrued by the franchisor over the payment period. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectability of the note is reasonably assured and substantial…arrow_forwardTopic: REVENUE FROM CONTRACTS WITH CUSTOMERS Requirement: Compute for the amounts of revenue to be recognized on each year of the six-year contract.arrow_forward
- 4.FOR NUMBERS 4 - 6:Brilliant Company sold a franchise to sell its products for P5,000,000 on January 1, 2021. The initial fee is payable P500,000 upon signing of the contract and the balance in 5 equal installments every December 31, evidenced by a 12% promissory note. The agreement provides that the franchisor will assist in the location of site, supervision of the building construction, project study or market survey, assistance in the acquisition of facilities, training and management of personnel, quality control, advertising and promotion. It was also agreed that the franchisee will pay a royalty fee equal to 5% of its average sales every calendar year. The franchise outlet was opened on May 1, 2021 and the average monthly sales of the franchisee is P100,000. The franchisor has incurred P1,500,000 related to the services required by the contract.1. How much is the Initial Franchise Fee Revenue to be recognized in 2021?arrow_forwardABC Franchisor entered into a franchise contract that will allow the franchisee to use ABC's copyright over a video. The contract is applicable for a period of 5 years. The transaction price is P100,00 cash to be paid on the date of grant. What is the journal entry to recognize the transaction price? [A] DR: Cash 100,000; CR: Franchise Revenue [B] DR: Cash - 100,000; CR: Contract Liability [C] DR: Contract Asset – 100,000; CR: Franchise Revenue [D] DR: Contract Asset – 100,000; CR: Contract Liabilityarrow_forwardOn October 1, 2018, the Submarine Sandwich Company entered into a franchise agreement with an individual.In exchange for an initial franchise fee of $300,000, Submarine will provide initial services to the franchisee toinclude assistance in design and construction of the building, help in training employees, and help in obtainingfinancing. Ten percent of the initial franchise fee is payable on October 1, 2018, with the remaining $270,000payable in nine equal annual installments beginning on October 1, 2019. These installments will include interestat an appropriate rate. The franchise opened for business on January 15, 2019.Required:Assume that the initial services to be performed by Submarine Sandwich subsequent to October 1, 2018, are substantial and that collectibility of the installment receivable is reasonably certain. Substantial performance of theinitial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries forthe following dates…arrow_forward
- Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in four equal annual installments of $12,500 each. These installments have a present value of $41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2020, training is completed, and the store opens on July 1, 2020. Prepare the journal entries required by Frozen Delight on April 1 and July 1, 2020.arrow_forwardFrozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in four equal annual installments of $12,500 each. These installments have a present value of $41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.arrow_forwardABC Company sells franchise arrangements throughout Luzon and Visayas. Under a franchise agreement, ABC receives P600,000 in exchange for satisfying the following separate performance obligations: • Franchisees have a five-year right to operate as an ABC's retail establishment in an exclusive sales territory • Franchisees receive initial training and certification, and • Franchisees receive an ABC building and necessary equipment. The stand-alone selling price of the initial training and certification is P15,000, and P450,000 for the building and equipment. ABC estimates the stand-alone selling price of the five-year right to operate as an ABC establishment using the residual approach. ABC received P75,000 on July 1, 2022, from a customer and accepted a note receivable for the rest of the franchise price. ABC will construct and equip the customer's building and train and certify the customer by September 1, and the customer's five-year right to operate as an ABC establishment will…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning