Question

Monitor Muffier sells franchise arrangements throughout the United States and Canada. Under a franchise agreement, Monitor receives $690,000 in exchange for satisfying the following separate performance obligations: (1) franchisees have a five-year right to operate as a Monitor Muffler retail establishment in an exclusive sales territory, (2) franchisees receive initial training and certification as a Monitor Mechanic, and (3) franchisees receive a Monitor Muffler building and necessary equipment. The stand-alone selling price of the initial training and certification is $16,800, and $522,000 for the building and equipment. Monitor estimates the stand-alone selling price of the five-year right to operate as a Monitor Muffler establishment using the residual approach. Monitor received $84,000 on July 1, 2021, from Perkins and accepted a note receivable for the rest of the franchise price. Monitor will construct and equip Perkins's building and train and certify Perkins by September 1, and Perkins's five-year right to operate as a Monitor Muffler establishment will commence on September 1 as well. Required: 1. What amount would Monitor calculate as the stand-alone selling price of the five-year right to operate as a Monitor Muffler retail establishment? 2. What journal entry would Monitor record on July 1, 2021, to reflect the sale of a franchise to Dan Perkins? 3. How much revenue would Monitor recognize in the year ended December 31, 2021, with respect to its franchise arrangement with Perkins? (Ignore any interest on the note receivable.) Complete this question by entering your answers in the tabs below. Required Required 2 Required What amount would Monitor calculate as the stand-alone selling price of the five-year right to operate as a Monitor Muffler retail establishment? Stand-alone selling price Required 2 >

Answer 1

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Requirement 1
Total amount of franchise agreement	$     690,000
Less: stand-alone selling price of training	$     (16,800)
Less: stand-alone selling price of building and equip	$   (522,000)
Stand-alone selling price of five-year right	$     151,200
Requirement 2
Cash	$       84,000
Notes receivable	$     606,000
Deferred revenue		$   690,000
Requirement 3
Revenue to be recognised on:
1st Sep 2021:
Training	$       16,800
Building and Equipment sale	$     522,000
31st Dec 2021:
$151,200/60 Months*4 Months (Sep-Dec)	$       10,080
Total Revenue to be recognized	$     548,880