Question

D. Franchise: Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2018, and on May 1, 2018 Rachel had completed training and was open for business. How much revenue in 2018 will Pita Pal recognize for its arrangement with Rachel?

Answer 1

Answer : $99,000.

Explanation :

Calculation of revenue in 2018 = Initial cost + Consulting fee

= $75,000 + [($36,000 / 12 months ) * 8 months]

= $99,000.

Since Pita received $75,000 for for providing initial training, equipment, and furnishings to Rachel (franchisee) & Pita performed its respective obligation in 2018 only (as Rachel started the business in 2018) . Thus $75,000 is part of 2018 revenue. In addition to this ,  Rachel started operation in May , 2018 , thus Rachel used Pita's consulting services for 8 months (May 18 to Dec 18). Thus consulting services of $24,000 [($36,000 / 12 ) * 8] is also a part of 2018 revenue.