Question 6

Identifying Performance Obligations and Recording Revenue from Franchise Rights

The Krispy Donuts franchise has agreements with 100 franchisees across the United States to operate bakeries. On January 1, Krispy Donuts grants a franchisee the right to operate a bakery in Minneapolis, Minnesota using the Krispy Donuts brand name, recipe, and other business concepts for a price of $300,000. On January 1, the franchisee made a down payment to the franchisor of $30,000 and paid the remaining $270,000 upfront fee on March 31. In exchange for the $300,000 payment, the franchisee received franchise rights, which include benefits of a national advertising campaign over the ten-year period (starting on the contract date) to promote the brand name of Krispy Donuts. The $300,000 payment also provides kitchen equipment from the franchisor (fair value of $36,000), and upfront training and assistance in setting up the franchise (fair value of $12,000). The training and assistance will be performed before the opening of the bakery. Equipment was delivered on April 1, and had a cost of $24,000. Krispy Donuts uses the residual method to measure the standalone value of the franchise rights. The bakery opened on June 1.

a. How many performance obligations are included in the franchise arrangement?

1 performance obligation2 performance obligations3 performance obligations4 performance obligations5 performance obligations

b. When does the franchisor recognize revenue for each performance obligation?

Sale of equipment	Recognize revenue over timeRecognize revenue at a point in time
Training and assistance	Recognize revenue over timeRecognize revenue at a point in time
Upfront fee	Recognize revenue over timeRecognize revenue at a point in time

c. Prepare the journal entries for the Krispy Donuts franchisor on January 1, March 31, April 1, and June 1.

Date	Account Name	Dr.	Cr.
Jan. 1	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
Mar. 31	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
Apr. 1	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	To record sale of equipment.
Apr. 1	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	To record cost of equipment.
June 1	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A

d. Assuming the franchisor has a December 31 year-end, prepare any journal entries required on December 31.

Date	Account Name	Dr.	Cr.
Dec. 31	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
	CashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Franchise Fee RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A