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Franchise revenue amounts and policies Pickin’ Chicken Ltd and Country Delight Ltd both sell franchises for their chicken restaurants. The purchaser of the franchise (the franchisee) receives the right to use Pickin’ Chicken’s or Country Delight’s products and benefit from national training and advertising programs for 10 years. The buyers agree to pay $50 000 for a franchise. Of this amount, $20 000 is paid upon signing the agreement and the remainder is payable in five equal annual instalments of $6000 each.
Pickin’ Chicken recognises all franchise revenue when franchise agreements are signed. Country Delight recognises franchise revenue as cash is received. In 2015, the companies each sold eight franchises. In 2017, they each sold five. In 2021 and 2022, neither company sold a franchise.
1 Determine the amount of franchise revenue recognised by each company in 2015, 2017, 2021 and 2022.
2 Do you think that revenue should be recognised when the franchise agreement is signed, when cash is received, or over the life of the franchise agreement? Why? Fully support your answer.