Revenue recognition; franchise sales
Response to the following problem:
On October 1 , 2016, the Submarine Sandwich Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $300,000, Submarine will provide initial services to the franchisee to include assistance in design and construction of the building, help in training employees, and help in obtaining financing. Ten percent of the initial franchise fee is payable on October 1, 2016, with the remaining $270,000 payable in nine equal annual installments beginning on October 1, 2017. These installments will include interest at an appropriate rate. The franchise opened for business on January 15, 2017.
Required:
Assume that the initial services to be performed by Submarine Sandwich subsequent to October 1, 2016, are substantial and that collectibility of the installment receivable is reasonably certain. Substantial performance of the initial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries for the following dates (ignoring interest charges):
1. October 1, 2016
2. January 15, 2017