On January 1, 2012, Lesley Benjamin signed an agreement to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2013. The agreement provides that the down payment is not refundable and that no future services are required of the franchisor. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.
Instructions
(a) How much should Campbell record as revenue from franchise fees on January 1, 2012? At what amount should Benjamin record the acquisition cost of the franchise on January 1, 2012?
(b) What entry would be made by Campbell on January 1, 2012, if the down payment is refundable and substantial future services remain to be performed by Campbell?
(c) How much revenue from franchise fees would be recorded by Campbell on January 1, 2012, if:
(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 Campbell 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?