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Chapter 18: Q39Q. (page 1032)

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?

Short Answer

Expert verified

If the franchisor has satisfied the performance standards associated with the fees, they should be recorded as income. When the linked items and services are given, these revenues are normally recognized over time.

Step by step solution

01

Meaning of Franchisor

A franchisor is a person or corporation that offers a third party a license to do business under their brand name. The franchisor owns the company's overall rights and trademarks and authorizes franchisees to do business under such rights and trademarks.

02

Franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees

Fees should be recognized as revenue if the franchisor has met the performance conditions connected with them. These revenues are generally recognized over time when the related products and services are provided. Continuing product sales would be tracked in the same manner that other product sales are.

Continuing franchise costs are paid in exchange for the franchise agreement's ongoing rights and services such as advertising, management training, marketing, legal help, and other assistance.

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Most popular questions from this chapter

How do companies recognize revenue from a performance obligation over time?

(Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan’s projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex’s Reclaimers revenue arrangement with Dan’s Demolition.

Explain the accounting for contract modifications.

What is the proper accounting for volume discounts on sales of products?

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(b) Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2017, and December 31, 2017.

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