In September, Fast-Foods Inc. (FF)sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September?

Question

Quizplus · Accepted Answer

Only the portion of the initial fee that relates to initial training, store design, and opening activities can be recognized as revenue in September. Therefore, revenue recognized in September would be 20% of the initial fee, which is $30,000 (20% x $150,000). The ongoing fees based on 3% of gross profit cannot be recognized as revenue until the related sales occur.