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In: Accounting

On January 1, 20x2, Entity A granted a franchise to Entity B involving a cosmetic stall...

On January 1, 20x2, Entity A granted a franchise to Entity B involving a cosmetic stall

The franchise agreement requires:

Entity B to pay non-refundable initial franchise fee amounting to 900,000 within ten days from the signing of document evidencing the franchise agreement.
The franchise agreement requires Entity B to pay contingent franchise fee equivalent to 10% of its sales revenue to Entity A. Entity B paid the initial franchise fee on January 10, 20x2.
In relation to initial franchise fee on January 10, 2021

Entity A is required to render the following separate and distinct performance obligations:
a. To construct the food stall of Entity B which has stand-alone selling price of 500,000
b. To allow Entity B use its registered trademark and tradename for a period of 20 years starting January 1, 20x2 which has stand-alone selling price of 200,000
C. To supply 5,000 units of raw materials to entity B which has stand-alone selling price of 300,000

On June 30, 20x2. Entity A completed the construction of Entity B’s cosmetic stall. As of December 31, 20x2, Entity has already delivered 2,000 units of raw materials to Entity B.
B commenced its operations on October 1, 20x2 and it reported sales revenue amounting to 330,000 for the period ended December 31, 20x2.

What is
A. the total revenue to be recognized by A for the period ended December 31, 20x2.
B. the unearned revenue to be reported by A on December 31, 20x2

Solutions

Expert Solution

Schedule showing computation of total revenue to be recognised and unearned revenue

Date Particulars Entity A
Jan 10 Non-refundable initial franchise payment       9,00,000
June 30 Completion of construction of Entity B cosmetic stall       5,00,000
Dec 31 Supply on raw materials (300,000/5,000*2,000)       1,20,000
Dec 31 Contingent franchise fee (330,000 X 10%)          33,000
Dec 31 Registered trademark fee (200,000*1/20)          10,000
Total revenue to be recognised     15,63,000
Unearned revenue
Dec 31 Supply of raw materials (300,000 / 5,000 * 2,000)       1,20,000
Dec 31 Registered trademark fee (200,000*19/20)       1,90,000
Total unearned revenue       3,10,000

ekkarill92 answered 2 years ago
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