Asked by Thomas Simmons on May 26, 2024
Verified
Initial franchise fees should be recorded as revenue by the franchisor
A) in accordance with the franchise agreement.
B) when cash is received from the franchisee.
C) when all material services relating to the sale have been substantially performed.
D) during the year the franchise agreement is signeD.
Initial Franchise Fees
The upfront cost paid by a franchisee to a franchisor to enter into a franchise agreement, typically covering training, support, and the right to use trademarks.
Revenue Recognition
The accounting principle that determines the specific conditions under which income becomes recognized as revenue.
- Analyze and account for initial franchise fees revenue.
Verified Answer
HJ
Holly JacobsMay 27, 2024
Final Answer :
C
Explanation :
According to the revenue recognition principle, revenue should be recognized when all material services related to the sale have been substantially performed. In the case of initial franchise fees, the franchisor has to provide a range of services to the franchisee, such as assistance with site selection, training, and support. Therefore, revenue should only be recorded when all these services have been adequately provided. This may not necessarily coincide with when cash is received or when the agreement is signed.
Learning Objectives
- Analyze and account for initial franchise fees revenue.