**Accounting for Franchise Arrangements: A Comprehensive Case Study**

*Introduction:*

Franchise arrangements are popular business models where one party, the franchisor, grants another party, the franchisee, the right to use its brand, trademark, and business model. This case study will explore the accounting principles associated with franchise arrangements, focusing on the perspective of a franchisor.

*Case Study: ABC Franchising Company*

**Step 1: Establishing Franchise Agreements**

ABC Franchising Company operates a successful fast-food chain and decides to expand its business through franchise agreements. The company identifies potential franchisees and enters into legal agreements specifying the terms and conditions of the franchise arrangement.

**Step 2: Initial Franchise Fees**

Upon entering into a franchise agreement, ABC Franchising Company often charges an initial franchise fee. This fee is recognized as revenue by the franchisor when it is earned, usually when the franchisee opens for business.

**Step 3: Continuing Fees and Royalties**

ABC Franchising Company typically receives continuing fees and royalties from franchisees based on their sales. These ongoing revenue streams are recognized as the services or support are provided to the franchisees.

**Step 4: Initial Direct Costs**

Any direct costs incurred to secure a new franchise agreement, such as legal fees or advertising, are capitalized and recognized as an asset. These costs are then amortized over the term of the franchise agreement.

**Step 5: Impairment of Franchise Rights**

If there are indicators of impairment, such as a decline in the franchise's market value or cash flows, ABC Franchising Company needs to assess the recoverability of its franchise rights and make necessary adjustments.

*Objective Type Question:*

**Fill in the blanks: Initial franchise fees received by a franchisor are recognized as revenue when ________, while ongoing royalties are recognized based on ________.**

A) Earned, the opening date of the franchise B) Collected, the signing of the franchise agreement C) Agreed upon, the sales of the franchisee D) Realized, the term of the franchise agreement

Please choose the correct option (A, B, C, or D) based on the information provided in the case study.