Franchise Accounting (A QuickNotes)
A franchise agreement involves the
granting of business rights by the franchisor to a franchisee that will operate
the franchise outlet in a certain geographical location.
Four types:
a. Manufacture-Retailer
b. Manufacture-Wholesaler
c. Service sponsor-retailer
d. Wholesaler-retailer
Initial Franchise Fee- recorded as
revenue only when and as the franchisor makes “substantial performance” of the
services it is obligated to perform and collection of the fee is reasonably
assured.
The
franchisor provides the franchisee with the following services:
1 . Assistance
in site location
a.
Analyzing the location
b. Negotiating
the lease
2 . Evaluation
of potential income
3 . Supervision
of construction income
4 . Supervision
of construction activity
a.
Obtaining financing
b. Designing
building
c.
Supervising contractor while building
5 . Provision
of bookkeeping and advisory services
a.
Setting up franchisee’s records
b. Advising on
income, real estate, and other taxes
c.
Advising on local regulations of the franchisee
business
6 . Provision
of employee and management training
7 . Provision
of quality control
Substantial Performance- no
remaining obligation to refund any cash received or excuse any non-payment of a
note
-performed
all the initial services required under the contract general Rule: 90% or more of the services required
3 Conditions to recognize initial franchise fee a. Services
b. Period of
refund
c. Collectibility
Journal Entries
A. Initial
Franchise fee-Interest Bearing Note
1. Performed all material services, the refund has expired, collectability is assured.
Cash
N/R
Franchise Revenue
2. Refund has
expired and collectability of the note is reasonably assured, not substantially
performed all material services.
Cash
N/R
Unearned Franchise Revenue
Subsequently;
when it is performed all services
Unearned Franchise Revenue
Franchise Revenue
3. Substantially
performed all services and the collectability of the note is reasonably
assured, but the refund period has not expired.
Cash
N/R
Unearned Franchise Revenue
Subsequently; the refund period has expires
Unearned
Franchise Revenue
Revenue from Franchise
4. Substantially
Performed all services, refund period has expired, but the collectability of
the note is not reasonably assured but it is used installment method
Cash
N/R
Franchise Revenue
Unearned Franchise Revenue
Subsequently, it recognizes it over a period of time.
Unearned Franchise Revenue
Franchise
Revenue
5. Refund has
expired, Substantially performed all services, no basis for estimating the
collectability of the note and the recognition of the note as an asset is not
unwarranted,so, it uses deposit method, not recognizing the note as an asset
Cash
Unearned Franchise Revenue
Subsequently, collectability is assured.
Unearned Franchise Revenue
Franchise
Revenue
B. Initial
Franchise Revenue-Non Interesting Fee
1. Reasonable
expectation that the down payment may be refunded, substantial future services
remain to be performed
Cash
N/R
Unearned
Interest Income (Discount on N/R)
Franchise
Revenue
2. If the
probability of refunding the initial franchise fee is extremely low, future
services to be provided to the
franchisee is minimal, collectability of the note is reasonably is assured,
substantial performance has occurred
Cash
N/R
Unearned
Interest Income
Franchise
Revenue
3. Initial
down payment is not refundable, represents a fair measure of the services
already provided, significant amount of services still to be performed,
collectability of the note is reasonably assured.
Cash
N/R
Unearned
Interest Income
Franchise
Revenue
Unearned
Franchise Revenue
4. Initial
down payment is not refundable, and no future services are required by the
franchisor, collection of the note is uncertain
Cash
Franchise Revenue
*when the collection of the note is extremely uncertain, revenue through gross profit is recognized by means of cash collection using the cost recovery method.
5. Same case
in #4 but the initial down payment is refundable or substantial services are
yet to be performed.
Cash
Unearned Franchise Revenue
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