Debbie acquired a franchise to operate a donut shop from Dollar Donuts, Inc., for $100,000. She incurred an additional $4,000 in legal costs to negotiate the terms with the franchiser. In five years, the franchise contract will be renegotiated. The current contract also states that there will be a $3,000 annual fee plus a two percent charge based on the store's annual revenue, which is expected to average 90,000 per year. What is the franchise cost that should be capitalized?

Question

Quizplus · Accepted Answer

The franchise cost that should be capitalized includes the initial fee paid to acquire the franchise ($100,000) plus the legal costs incurred to negotiate the franchise terms ($4,000), totaling $104,000. The annual fees and percentage charges based on revenue are considered operating expenses and are not capitalized.

Debbie Acquired a Franchise to Operate a Donut Shop from Dollar