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question 16. study bank
Jenson.Jenson owns the rights to a fast food franchise. on 1 april 2012 it sold the right to open a new outlet to mr. cody. the franchise is for five years. Jenson received an intitial fee of $50,000 for the first year and will receive $5000 per year thereafter, Jenson has continuing service obligations on its franchise for advertising and product development that amount to approx. $8000 per year per franchised outlet. A reasonable profit margin on rendering the continuing services is deemed to be 20% of revenues received.
required:
describe how Jenson should treat the tranasction.i need help in understanding the transaction SOS
An earlier response to this post rambled on about finance and operation leases which I believe is totally irrelevant. This seems to me to be a question of revenue recognition.
Interesting that this is a question from a study text – does the study text not give you the solution?
The total amount to be earned by Jensen is $50,000 + 4 x $5,000 = $70,000
Continuing obligations amount to $10,000 ($8,000 (Cost) + 20% (profit margin) = $10,000
The revenues, costs and profit element on those continuing obligations should be recognised in each of years 2 – 5
That would leave $30,000 revenue, $8,000 costs and therefore $22,000 profits to recognise in year 1
Did I pass?
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