Question

Monitor Muffler sells franchise arrangements throughout the United States and Canada. Under a franchise agreement, Monitor receives $760,000 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 $18,200, and $578,000 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 $89,000 on July 1, 2016, from Perkins and accepted a note receivable for the rest of the franchise price. Monitor will construct and equip Perkin's building and train and certify Perkins by September 1, and Perkin'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, 2016, to reflect the sale of a franchise to Dan Perkins?
3. How much revenue would Monitor recognize in the year ended December 31, 2016, with respect to its franchise arrangement with Perkins? (Ignore any interest on the note receivable.)
Total revenue

Answer 1

Answer:

1. $163,800

2. Dr Cash $ 89,000

Dr Notes receivable $ 671,000

Cr Deferred revenue $ 760,000

3. $ 607,120

Explanation:

1. Computation of the amount that Monitor would calculate as the stand-alone selling price

Total amount of franchise agreement $760,000

Less: stand-alone selling price of training $ (18,200)

Less: stand-alone selling price of building and equip $ (578,000)

Stand-alone selling price of five-year right $163,800

2. Preparation of journal entry that Monitor would record on July 1, 2016,

Dr Cash $ 89,000

Dr Notes receivable $ 671,000

(760,000-89,000)

Cr Deferred revenue $ 760,000

3. Calculation for the amount of revenue that Monitor would recognize in the year ended December 31, 2016,

Revenue to be recognised on:

1st Sep 2021:

Training $ 18,200

Building and Equipment sale $ 578,000

31st Dec 2021:

$163,800/60 Months*4 Months $ 10,920

Total Revenue to be recognized $ 607,120

Note that five-year will give us 60 months (5*12months and September to December will give us 4 months