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Questions and Answers
What is a franchise defined as in the context of accounting?
What is a franchise defined as in the context of accounting?
- A method of selling goods online
- A partnership between two companies
- An agreement to lease property
- A contract that gives rights to an entity's intellectual property (correct)
Which of the following is classified as a non-distinct performance obligation?
Which of the following is classified as a non-distinct performance obligation?
- Selling products under the franchisor’s brand (correct)
- Delivery of equipment
- Access to a franchisor's brand
- Start-up training services
What is considered the transaction price (TP) in franchise accounting?
What is considered the transaction price (TP) in franchise accounting?
- Subsequent service fees
- Ongoing royalty fees
- Initial franchise fee (correct)
- Monthly product purchase costs
How are non-refundable upfront fees recorded in franchise accounting?
How are non-refundable upfront fees recorded in franchise accounting?
What type of intellectual property can be licensed in a franchise?
What type of intellectual property can be licensed in a franchise?
Which component must be evaluated to determine if a significant financial component exists in a franchise arrangement?
Which component must be evaluated to determine if a significant financial component exists in a franchise arrangement?
What does the term 'distinct' refer to in the context of performance obligations?
What does the term 'distinct' refer to in the context of performance obligations?
If a franchisor provides training services as part of the franchise agreement, how should this be classified?
If a franchisor provides training services as part of the franchise agreement, how should this be classified?
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Study Notes
Franchise Accounting: Overview
- A franchise establishes a customer's rights to an entity's intellectual property (IP).
- Examples of IP licenses include software, technology, franchises, and patents.
Step 1: Identifying the Contract
- The franchise agreement is the contract between the franchisor and franchisee.
- The agreement grants the franchisee rights to sell the franchisor's products.
Step 2: Identifying Performance Obligations
- Determine if performance obligations are distinct or not distinct.
- Distinct obligations have separate utility and are separately identifiable.
- Examples of performance obligations include rights to use a brand, equipment, products, and services (startup, training).
Step 3: Determining the Transaction Price
- The transaction price (TP) is the consideration for establishing the franchise relationship and initial services.
- TP includes non-refundable upfront fees (initial franchise fee).
- TP is allocated to performance obligations.
- Non-refundable upfront fees are recorded as unearned revenue until performance obligations are satisfied.
- If a significant financial component exists, use present value (PV) for TP (excluding interest).
- Interest is recorded as unearned interest income.
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