Question

Trans Fat Express, Inc. entered an agreement with a franchisee on July 1, 2019. The agreement specified that Trans Fat Express receive an initial franchise fee of $400,000 (30% due at signing; the balance to be paid in equal annual installments plus interest at 8% of the unpaid balance beginning July 1, 2020). The $400,000 franchise fee is comprised of (1) consideration for the right to operate the franchise, and (2) payment for services to be performed by Trans Fat Express that include site selection and building design, employee training, and management training. Performance of these services occurs evenly from July 1 to the date when the franchise opens for business on March 1, 2020. All required services are deemed to have occurred by then. Trans Fat Express allocates 60% of the fee to the right to operate the franchise and the remainder to the services performed. Ignore interest income in the following.

Required:

1. How much revenue does Trans Fat Express, Inc. recognize in 2019?
2. How much revenue does Trans Fat Express, Inc. recognize in 2020?

Answer 1

Revenue generated by Trans Fat Express in the year 2019

The agreement specifies that Trans Fat receives an initial franchise fee of $400,000 (30% due at signing; the balance to be paid in equal annual installments plus interest at 8% of the unpaid balance beginning July 1, 2020)

The agreement signed on July 1, 2019  

400,000 * 30% = 120,000

So the answer is $120,000

Revenue generated by Trans Fat Express in the year 2020 (Interest Ignored)

The balances to be paid in equal annual installments plus interest at 8% of the unpaid balance beginning July 1, 2020

The equal annual installment starts on July 1, 2020. So the first annual installment should be paid by the franchise on July 1, 2021.

So the answer is zero revenue.