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. The franchise cost that should be capitalized is

Question

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The franchise cost that should be capitalized includes the initial franchise fee of $100,000 and the legal costs of $4,000, totaling $104,000. The annual fees and percentage charges based on revenue are not capitalized; they are expensed as incurred.

Debbie Acquired a Franchise to Operate a Donut Shop from Dollar