B is corrent. Franchise fee revenue shall be recognized when all material services have been substantially performed by the franchisor (i.e., the franchisor has no remaining obligation to refund any cash received and substantially all of the initial services of the franchisor have been performed). Of the initial fee of $75,000, the $30,000 down payment applies to the initial services already performed by Reed. Additionally, this amount is not refundable. Therefore, the $30,000 may be recognized as revenue in year 1. The three remaining $15,000 installments relate to substantial future services to be performed by Reed. The present value of these payments, $36,000, is recorded as unearned fees and recognized as revenue once substantial performance has occurred.
A is incorrect. Franchise fee revenue shall be recognized when all material services have been substantially performed by the franchisor (i.e., the franchisor has no remaining obligation to refund any cash received and substantially all of the initial services of the franchisor have been performed). Of the initial fee of $75,000, the $30,000 down payment applies to the initial services already performed by Reed. Additionally, this amount is not refundable. Therefore, the $30,000 may be recognized as revenue in year 1. The three remaining $15,000 installments relate to substantial future services to be performed by Reed. The present value of these payments, $36,000, is recorded as unearned fees and recognized as revenue once substantial performance has occurred.
A is incorrect. Franchise fee revenue shall be recognized when all material services have been substantially performed by the franchisor (i.e., the franchisor has no remaining obligation to refund any cash received and substantially all of the initial services of the franchisor have been performed). Of the initial fee of $75,000, the $30,000 down payment applies to the initial services already performed by Reed. Additionally, this amount is not refundable. Therefore, the $30,000 may be recognized as revenue in year 1. The three remaining $15,000 installments relate to substantial future services to be performed by Reed. The present value of these payments, $36,000, is recorded as unearned fees and recognized as revenue once substantial performance has occurred.
A is incorrect. Franchise fee revenue shall be recognized when all material services have been substantially performed by the franchisor (i.e., the franchisor has no remaining obligation to refund any cash received and substantially all of the initial services of the franchisor have been performed). Of the initial fee of $75,000, the $30,000 down payment applies to the initial services already performed by Reed. Additionally, this amount is not refundable. Therefore, the $30,000 may be recognized as revenue in year 1. The three remaining $15,000 installments relate to substantial future services to be performed by Reed. The present value of these payments, $36,000, is recorded as unearned fees and recognized as revenue once substantial performance has occurred.
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