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Chapter 18: Q38Q. (page 1032)

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

Short Answer

Expert verified

When many of the franchisor's services are yet to be done, it is inappropriate to record the whole franchise price as income at the time of sale.

Step by step solution

01

Meaning of Franchise Arrangements

Permission to run a business, use the franchisor's trade name or other intellectual property, and continuing services like marketing help, training, and, in certain cases, delivering inventory and inventory management are all referred to as a franchise arrangement.

02

Explanation for recognizing the revenue

It is inappropriate to record the whole franchise price before performing all the franchisor’s services. That is why it is improper to recognize revenue at the time of sale. Hence, in this case, the revenues must be recognized after completing all the services.

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Most popular questions from this chapter

What qualitative and quantitative disclosures are required related to revenue recognition?

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Instructions

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