Problem
Your family has decided to buy a Chipotle franchise from Chipotle Inc. The initial franchise fee of $800,000 must be paid up front and entitles you to "store design" specifications 8 months of employee training, Chipotle recipes, and access to promotional materials to open your store successfully. In addition, the dales contract specifies that once the store is open you have to pay Chipotle a monthly fee (the "ongoing franchise fee") equal to 10% of all the revenues for the month. Chipotle recognition of revenue from this franchise sale will include:
a) Recognizing no revenue on the day of the sale and recognition of the $800,000 at the end of your first year of business because of conservatism.
b) Recognizing the "ongoing franchise fee" each month as it becomes due based on the operating terms as the franchise is operating.
c) Recognition of the $800,000 on the day you pay this amount due to a concern for relevant financial reporting,
d) Recognizing unearned revenue of $800,000 on the day of the dale and then recognizing revenue when (or as) each performance obligation is completed under the contract.
e) Both b and d are valid parts of Chipotles revenue recognition approach.