7) On January 1, 2017, Franchisor Inc. sold the rights to open a new franchise location...

7) On January 1, 2017, Franchisor Inc. sold the rights to open a new franchise location to Franchisee Corp. The franchise lasts for ten years. The terms of the contract include the following:

•A one-time fee of $50,000, due upon contract signing and an annual payment of $25,000 due on December 31 each year for the duration of the franchise agreement (ten annual payments of $25,000 first due December 31, 2017). These payments are for equipment (delivered at time of contract signing) and a commitment by Franchisor Inc.'s to provide technical support on an ongoing basis.

•4% of gross franchisee sales is payable monthly by Franchisee Corp. to Franchisor Inc., to cover marketing and advertising costs for the franchise.

Other information

•The stand-alone sales price for the equipment and technical support are $160,000 and $9,000 per annum respectively. Franchisor Inc. has determined that a 5% discount rate appropriately reflects the credit risk rate associated with Franchisee Corp.

•Franchisor Inc. delivered the equipment at time of the contract signing. It was carrying these items in its inventory at a cost of $135,000.

•Franchisee Corp. pays both the upfront fee and the first payment on the instalment contract on the stipulated payment dates.

•Franchisee Corp.'s gross franchise sales for 2017 totalled $1,000,000 but due to an oversight, Franchisor Inc. has not yet invoiced Franchisee Corp. for any marketing and advertising fees.

Required:

a. Identify the distinct performance obligations in this contract.

b. Determine the transaction price.

c. Allocate the transaction price to the performance obligations.

d. Prepare Franchisor Inc.'s journal entries for 2017. Assume that it only accrues revenue at year-end.

Expert Solution

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