Question

The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:a. Revenue under the installment sales method, as soon as it has assisted Steffi in setting up the store.b. $50,000 of revenue when Steffi signs the agreementc. $50,000 of revenue as soon as it has assisted Steffi in setting up the stored. Revenue under the installment sales method, starting when Steffi signs the agreement

Answer 1

Answer: A- Revenue under the installment sales method, as soon as it has assisted Steffi in setting up the store.

Explanation: The installment sales method is a method of accounting accepted under the US Gaap. It is a method were revenue is recorded in instalments and the cost of sales and gross profit recognised upon the collection of the installment revenue.

It is a method of accounting used mainly by construction companies whose revenue are not received once but in installments.