Chapter 1: Environment and Theoretical Structure of Financial Accounting

REVENUE RECOGNITION FOR FRANCHISES c. record the portion of the initial franchise fee which is attributable to the bargain purchase
22. Franchise fees are properly recognized as revenue option as a reduction of the future amounts receivable from the franchisee.
a. when received in cash. d. None of these. K, W & W
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations. Continuing Franchise Fees.
d. after the franchiser has substantially performed its service. S, S & S 28. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
Initial Franchise Fee b. as revenue when received. K, W & W
Allocation of initial franchise fee. c. in accordance with the accounting procedures specified in the franchise agreement.
27. Some of the initial franchise fee may be allocated to d. as revenue only after the balance of the initial franchise fee has been collected.
a. continuing franchise fees.
b. interest revenue on the future installments. JOURNAL ENTRIES
c. options to purchase the franchisee's business. Accounting for initial and annual continuing franchise fees.
d. all of these may reduce the amount of the initial franchise fee that is recognized as 51. On January 1, 2001 Dairy Delight, Inc. entered into a franchise agreement with a company
revenue. K, W & W allowing the company to do business under Dairy Delight's name. Dairy Delight had performed
substantially all required services by January 1, 2001, and the franchisee paid the initial
Future bargain purchase option. franchise fee of $105,000 in full on that date. The franchise agreement specifies that the
29. Occasionally a franchise agreement grants the franchisee the right to make future bargain franchisee must pay a continuing franchise fee of $9,000 annually, of which 20% must be
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor spent on advertising by Dairy Delight. What entry should Dairy Delight make on January 1,
should 2001 to record receipt of the initial franchise fee and the continuing franchise fee for 2001?
a. increase revenue recognized from the initial franchise fee by the amount of the expected a. Cash 114,000
future purchases. Franchise Fee Revenue 105,000
b. record a portion of the initial franchise fee as unearned revenue which will increase the Revenue from Continuing Franchise Fees 9,000
selling price when the franchisee subsequently makes the bargain purchases. b. Cash 114,000
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases Unearned Franchise Fees 114,000
are made. c. Cash 114,000
d. None of these. K, W & W Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 7,200
Option to purchase franchisee's business agreement. Unearned Franchise Fees 1,800
30. A franchise agreement grants the franchisor an option to purchase the franchisee's business. d. Prepaid Advertising 1,800
It is probable that the option will be exercised. When recording the initial franchise fee, the Cash 114,000
franchisor should Franchise Fee Revenue 105,000
a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's Revenue from Continuing Franchise Fees 9,000
investment in the purchased outlet when the option is exercised. Unearned Franchise Fees 1,800
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of K, W & W
cash paid when the option is exercised.

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Chapter 1: Environment and Theoretical Structure of Financial Accounting

Cancellation of franchise agreement. 2. Assume that at the time of signing the contract, collection of the receivable was assured and
50. On April 1, 2001 Reebles, Inc. entered into a franchise agreement with a local business-man. that service obligations were substantial. However, by October 20, 2003, substantially all
The franchisee paid $75,000 and gave a $50,000, 8%, 3-year note payable with interest due continuing obligations had been met. The journal entry required at October 20, 2003 would
annually on March 31. Reebles recorded the $125,000 initial franchise fee as revenue on April include a:
1, 2001. On December 30, 2001, the franchisee decided not to open an outlet under Reebles' A. Credit to franchise fee receivable for $27,000.
name. Reebles canceled the franchisee's note and refunded $40,000, less accrued interest on B. Credit to franchise fee revenue for $9,000.
the note, of the $75,000 paid on April 1. What entry should Reebles make on December 30, C. Debit to unearned franchise fee revenue for $36,000.
2001? K, W & W D. Debit to unearned franchise fee revenue for $27,000.
a. Loss on Repossessed Franchise 40,000
Cash 40,000 3. Assume at the time of signing the contract, collectibility of the receivable was reasonably
b. Loss on Repossessed Franchise 37,000 assured and there were no significant continuing obligations. The journal entry at signing
Cash 37,000 would include a:
c. Loss on Repossessed Franchise 87,000 A. Credit to franchise fee revenue for $36,000.
Cash 37,000 B. Credit to franchise fee revenue for $9,000.
Note Receivable 50,000 C. Credit to unearned franchise fee revenue for $36,000.
d. Revenue from Franchise Fees 125,000 D. Credit to unearned franchise fee revenue for $27,000.
Interest Income 3,000
Cash 37,000
Note Receivable 50,000 1
. (C) Cash 6,000
Revenue from Repossessed Franchise 35,000 Note receivable 30,000
Unearned franchise fee revenue 36,000
Use the following to answer questions 73-75: S, S & T
Happy Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating 2
. 10/20/03: Unearned franchise fee revenue 36,000
fees of $500 per month. The initial fee covers site selection, training, computer and accounting Franchise fee revenue 36,000
software, and on-site consulting and troubleshooting, as needed, over the first five years. On
March 15, 2003, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the 3
. (A) Cash 6,000
balance due over 5 years with interest. Note receivable 30,000
Franchise fee revenue 36,000
1. Assuming that the initial services to be performed by Happy Jack's subsequent to the signing
are substantial and that collection of the receivable is reasonably assured, the journal entry
required at signing would include a credit to:
A. Franchise fee revenue for $36,000.
B. Franchise fee revenue for $ 6,000.
C. Unearned franchise fee revenue for $36,000.
D. Unearned franchise fee revenue for $30,000.

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