Joanie's Java sells franchises of its coffee shop concept.Franchisees pay a $375,000 initial franchise fee at the time of signing the contract.In return Joanie's Java provides assistance until the coffee shop is opened, usually a period of six months.After opening the franchisee pays a royalty of 2% of sales.What are the appropriate revenue recognition polices for Joanie's Java as a franchisor?
A)The $375,000 fee at the time of signing and the 2% royalty when received.
B)The $375,000 fee when the coffee shop opens and the 2% royalty when received.
C)The $375,000 fee at the time of signing and the 2% royalty on an accrual basis.
D)The $375,000 fee when the coffee shop opens and the 2% royalty on an accrual basis.

Question

Quizplus · Accepted Answer

According to the revenue recognition policies for franchisors, the initial franchise fee should be recognized when the coffee shop opens because Joanie's Java has fulfilled its obligation by providing assistance until the shop opens. Therefore, the $375,000 fee should be recognized at the time of the shop's opening. The royalty of 2% should be recognized when received, as it is an ongoing payment based on sales. Thus, the correct option is B.

Joanie's Java Sells Franchises of Its Coffee Shop Concept