[Jasminekoko]

NINJA Question –

Hello again,

I wonder why the 34,000 is recognized as franchise revenue? Is it because no further services are required in the future? I thought no further service required applies to the 25,000 cash refundable so I picked 25,000 as franchise revenue. Hope someone can help me with this. I know this is a simple question yet I still need to be sure .

Thank you guys.

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?

A. $0

Incorrect B. $25,000

C. $59,000

D. $65,000

You answered B. The correct answer is C.

Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.

[mommyof3texans]

The way I understand franchise initial fee recognition is this:

Ignore the cash part, it only has bearing on the J/E really. The initial fee can be recognized when it is substantially performed. The line about it being nonrefundable and no future benefit essentially resolves that piece for you, which means you can recognize the amount related to the period, which is the whole fee ($25k cash plus the $34k pv of remaining pymts)

BEC - 02/21/15 - 82
FAR - 05/29/15 - 82
AUD - 07/09/15 - 93
REG - 11/14/15 - 80

All done!!!

[Future Ninja]

@Jasminekoko – you need to know their entries also. It will be helpful on your exam day. Good luck!

AUD - 79 (expired) retaking July 28,2016
FAR - 76 expiring July 31, 2016
BEC - 85
REG - 74,74,74,74,59,70,

[Author]

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