FRANCHISE ACCOUNTING

WHAT IS FRANCHISING it is where a leading , known business entered into agreement in which for fee ONE PARTY ( FRANCHISOR) gives the
other party ( FRANCHISEE) the rights to perform certain functions or sell certain products or services of the franchisor.

A SUBSTANTIAL PERFORMANCE OF THE FRANCHISOR IS THE KEY TO RECOGNITION OF THE INITIAL FRANCHISE FEE. SUBSTANTIAL
PERFORMANCE OF THE FRANSHISOR DENOTES CONSUMMATION OFTHE TRANSACTIONS WHEN:

1. THERE IS NO REMAINING OBLIGATION BY AGREEMENT , TRADE OR PRACTICE TO REFUND THE INITIAL FEE. OR TO EXCUSE NON PAYMENT
OF UNPAID NOTES
2. SUBSTANTIALLY ALL THE INITIAL SERVICES OF THE FRANCHISOR HAVE BEEN PERFORMED
3. ALL OTHER CONDITIONS WHICH AFFECT CONSUMMATION HAVE BEEN MET.

EXAMPLE :

INITIAL FEE IS 250,000.00 , INITIAL DOWN IS 50,000, BALANCE OF 40,000 YEARLY PAY AT 12% INTEREST.

METHOD 1 ( THE SUBSTANTIAL FUTURE SERVICES ARE YET TO BE PROVIDED TO THE FRANCHISEE, THAT MEANS PERFORMANCE OF
FRANCHISOR HAS YET TO OCCUR.

CASH 50,000
NOTES RECEIVABLE 200,000
UNEARNED INITIAL FEE 250,000

TAKE NOTE IT IS CREDITED TO A SUSPENSE ACCOUNT, OR DEFERRED ACCOUNT OR A LIABILITY ACCOUNT. BECAUSE THE PERFORMANCE HAS
NOT YET SUBSTANTIALLY MET.

METHOD 2 THE PROBABILITY OF REFUNDING IS REMOTE AND THE AMOUNT OF FUTURE SERVICES OF FRANCHISOR IS MINIMAL, THAT
MEANS PERFORMANCE HAS ALMOST TAKEN PLACE.

CASH 50,000
NOTES REC 200,000
REVENUE EARNED 250,000

TAKE NOTE IT IS CREDITED TO AN DEFINITE INCOME ACCOUNT BECAUSE THE POSSIBILITY OF THE AGREEMENT TO TAKE PLACE.

METHOD 3

THE DOWN PAYMENT IS NOT REFUNDABLE , BUT A SIGNIFICANT SERVICES BY THE FRANCHISOR IS YET TO BE PERFORMED

CASH
NOTES
UNEARNED 200,000
REVENUE EARNED 50,000
SINCE THE DOWN IS NOT REFUNDABLE , IS CREDITED DIRECT TO INCOME ACCOUNT.

METHOD 4

THE DOWN IS NOT REFUNDABLE ., THE COLLECTION OF NOTES IS UNCERTAIN , SO NOTES IS NOT RECORDED

CASH 50,000
EARNED REVENUE

METHOD 5

THE DOWN IS EITHER REFUNDABLE . OR SUBSTANTIAL SERVICES MUST BE PERFORMED BEFORE THE FEE CAN BE CONSIDERED EARNED.

CASH
UNEARNED FEE

IN THE FRANCHISE AGREEMENT , THERE ARE A LOT OF CONDITIONS:

1. THERE IS AN INITIAL FRANCHISE FEE NORMALLY FOR A NUMBER OF YEARS WITH A LOT OF CONDITIONS SUCH AS:
a. AMOUNT OF DOWN PAYMENT AT A CERTAIN TIME LIKE UPON SIGNING OF THE AGREEMENT
b. a certain amount again on a certain date say start of operation , or a certain conditions that has to be met.
c. the balance covered by a notes with interest for a certain period and the date of the start of amortization

2. THERE IS ALSO SOME COST OR EXPENSES BY THE FRANCHISOR ASSOCIATED TO THE INITIAL FEE SUCH AS TRANSFER OF FIXED
ASSETS, TRAINING AND DEVELOPMENT COST . ALL OF WHICH IS TIED UP WITH A DATE OF PERFORMANCE.

3. THERE IS ALSO A CONTINUING FEE BASED ON WHATEVER IS THE AGREEMENT, SAY A PERCENTAGE OF SALES, FOR A CERTAIN NUMBER OF
PERIODS, THEN THAT FEE IS CHANGED FOR ANOTHER AMOUNT ONWARD.
4. THERE IS ALSO A CONTINUING COST TO BE INCURRED BY FRANCHISOR . THE FAIR MARKET VALUE OF THIS CONTINUING COST IS ALSO
DETERMINED.

ILLUSTRATIVE PROBLEM

A CONTRACT HAS BEEN SIGNED ON MAY 1, 2011, WITH THE FF; PROVISIONS

1. AN INITIAL IRREVOCABLE FEE OF 500,000 TO BE PAID AS FF:

100,000 UPON SIGNING mAY 1, 2011
50,000 WHEN OPERATION STARTS. IN OCTOBER 2011
350,000 PAYABLE 7 YEARS OR 50,000 BEG. MAY 1 2011 AT 12% INTEREST.

2. DIRECT COST ASSOCIATED WITH THE INITIAL FEE THIS IS NOT A CONTINUING COST, THIS IS RELATIVE TO THE INITIAL FEE.

a 80,000 COST OF EQUIPMENT DELIVERY ON MAY1 2011, THE FAIR MARKET IS 120,000.
b. initial services of 140,000 , 50,000 prior to signing, 90,000 to be incurred in oct 1 2011.

3. CONTINUING FEE of 10% of gross sales , which is estimated to be 90,000 per month , for 3 years , then 150,000 a month thereafter.

4. CONTINUING COST starting the commencemnent of operation, to be incurred by franchisor 10,000 a month., these cost have a fair market
value of 11,000.

JOURNAL ENTRIES:

MAY 1

1. CASH 100,000
NOTES REC. 350,000
REVENUE 120,000
UNEARNED REVENUE 330,000

THE REVENUE OF 120,000 IS ARRIVED AT BECAUSE THE EQUIPMENT WAS PERFORMED BY THE FRANCHISOR ON TIME, OF COURSE THE 330,000
IS ASSUMED TO BE UNEARNED DEPENDING ON THE DATE OF THE PERFORMANCE OF ANY AGREEMENT.

2. COST OF EQUIPMENT 80,000

MACHINERY AND EQUIPMENT 80,000

OF COURSE IF THERE IS ACCUMULATED DEPN , IT IS DEBITED

3. FRANCHISE EXPENSE 60,000

ACCTS. PAYABLE 60,000
this is relative to initial fee and not regular continuing fee

OCT 1

1. CASH 50,000
REVENUE FROM INITIAL FEE 50,000
THIS IS AS PER AGREEMENT TO BE RECEIVED OCT.

2. UNEARNED INITIAL FRANCHISE FEE 258,000

REVENUE FROM INITIAL FRANCHISE FEE 258,000

explanation : since all the agreement by oct has already been met, a need to recognized the actual revenue must be computed.
supposed to be the 330,000 is credited to revenue on entry no. 2 in OCT. but the 72,000 has not incurred yet by the franchisor because it will
be incurred monthly, hence cannot credit to revenue in total now. THAT IS WHY 330,000 LESS 72,000 IS 258,000.00 this 72,000 will be
amortized for 36 months.

THE INITIAL FEE IS 500,000

1. TO DEDUCT THE FAIR MARKET VALUE OF THE EQUIPMENT (120,000)
2. TO DEDUCT THE POSSIBLE DEFICIENCY BETWEEN THE
CONTINUING FEE AGAINSt THE CONTINUING COST as ff:.

THE CONTINUING FEE IS ONLY( 90,000 X 10% 9,000

THE CONTINUING COST IS HAS A FAIR MARKET VALUE OF 11,000
DEFICIENCY A MONTH 2,000
FOR 3 YEARS AS PER CONTRACT 36 MOS
TOTAL .................................... ( 72,000
--------------------------------------------------------------------------------------------------
ADJUSTED INITIAL FEE 308,000
--------------------------------------------------------------------------------------------------
LESS : THE PAYMENT IN OCT and already credited to revenue ( 50,000)
NET .......... TO BE CREDITED TO REVENUE FROM INITIAL FEE 258,000

3. FRANCHISE EXP 80,000

ACCTS. PAYABLE

4. CASH 9,000
UNEARNED INITIAL 2,000
REVENUE CONTINUING FEE 11,000
THE 2,000 IS DEBITED TO UNEARNED FOR THE NEXT 36 MONTHS TO CLOSE THE UNEARNED INITIAL REVENUE

5. franchise exp 10,000

accts/ pay 10,000

NOVEMBER

CASH 9,000
UNEARNED INITIAL REVENUE 2,000
REVENUE EARNED CONTINUING 11,000

FRANCHISE EXP 10,000

PAYABLE 10,000

DECEMBER

CASH 9,000
UNEARNED 2,000
REVENUE 11,000

FRANCHISE EXP 10,000

PAYABLE 10,000

INTEREST RECEIVABLE 28,000

INTEREST INCOME 28,000
TO ACCRUE INTEREST INCOME

JAN 2012

INTEREST INCOME 28,000

INT. REC 28,000
REVERSE THE ACCRUED.

CASH 9,000
UNEARNED 2,000
REVENUE 11,000

franchise exp 10,000

 accts. pyable 10,000

this will be the repetitive entry onward , except the amortization f the 2,000.00 and of course the additional entry on the collection of notes
receivable

A deferred cost is a cost that you have already incurred, but which you will not charge to expense until
a later reporting period. In the meantime, it appears on the balance sheet as an asset. The reason for
deferring recognition of the cost as an expense is that you have not yet consumed the item. You may
also defer recognition of a cost if you wish to recognize it at the same time as related revenue is
recognized, under the matching principle.