Reference no: EM13765277

(Franchise Fee, Initial Down Payment)

On January 1, 2014, Shaw & Shaw signed an agreement to operate as a franchisee of World Premiere Salons for an initial franchise fee of $130,000. The amount of $20,000 was paid when the agreement was signed, and the balance is payable in four annual payments of $27,500 each, beginning January 1, 2015. The agreement provides that the down payment is not refundable and that no future services are required of the franchisor. Shaw & Shaw's credit rating indicates that the company can borrow money at 10% for a loan of this type.

Instructions

(a) How much should World Premiere Salons record as revenue from franchise fees on January 1, 2014? At what amount should Shaw & Shaw record the acquisition cost of the franchise on January 1, 2014?

(b) What entry would be made by World Premiere Salons on January 1, 2014, if the down payment is refundable and substantial future services remain to be performed by World Premiere Salons?

(c) How much revenue from franchise fees would be recorded by World Premiere Salons on January 1, 2014, under the following conditions?

(1) The initial down payment is not refundable, it represents a fair measure of the services already provided, a significant amount of services is still to be performed by World Premiere Salons in future periods, and collectibility of the note is reasonably assured.

(2) The initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted.

(3) The initial down payment has not been earned and collection of the note is so uncertain that recognition of the note as an asset is unwarranted.