Problem:
Freys, Inc., sells a 12-year franchise to Reynaldo. The franchise contains many restrictions on how Reynaldo may operate his store. For instance, Reynaldo cannot use less than Grade 10 Idaho potatoes, must fry the potatoes at a constant 410 degrees, dress store personnel in Freys-approved uniforms, and have a Frey's sign that meets detailed specifications on size, color and construction. When the franchise contract is signed Reynaldo makes a noncontingent $160,000 payment to Freys. During the same year, Reynaldo pays Freys $300,000?14% of Reynaldo's sales. How does Freys treat each of these payments? How does Reynaldo treat each of the payments?