Question

Big Daddy’s BBQ, Inc. (Big Daddy’s), franchises restaurants. The company currently has approximately 215 franchisees operating Big Daddy’s restaurants in 22 states.
Big Daddy’s standard franchise agreement has a 10-year term, with one 10-year renewal option. It provides for a one-time payment of an initial franchise fee and a continuing royalty fee based on gross sales. Sales reports and financial statements are regularly collected from franchisees.
Each franchisee is responsible for selecting the location for its restaurant, subject to Big Daddy’s approval (based on demographics, competition, traffic volume, etc.). Each franchised restaurant must have a designated manager and assistant manager who have completed Big Daddy’s six-week manager training program or who have been otherwise approved by the company. For the opening of a restaurant, Big Daddy’s provides consultation and makes company personnel generally available to a franchisee. In addition, the company sends a team of personnel to the restaurant for up to two weeks to assist the franchisee and its managers in the opening, the initial marketing and training effort, as well as the overall operation of the restaurant.
Initial franchise fees are recognized when the company has substantially performed all material services and the restaurant has opened for business. Franchise royalties, which are based on a percentage of monthly sales, are recognized as income on the accrual basis. Costs associated with franchise operations are recognized on the accrual basis.

Assume that:
1. Big Daddy’s entered into a standard franchise agreement on July 1, 2014, with Linda Bundy to open a Big Daddy’s BBQ in Lewisburg, PA.
2. The agreement called for an initial franchise fee of $300,000 and a 2.0% royalty. $75,000 of the fee is payable immediately; the remainder is to be paid in equal annual installments each July 1 over the life of the franchise agreement.
3. Interest of 5% on the unpaid franchise fee balance is also payable each July 1.
4. Royalty payments are to be submitted with accompanying financial statements 15 days after the end of each quarter.
5. The restaurant opened on September 30, 2014. Big Daddy’s management sent a team to assist with the opening. Because Bundy felt that this assistance would be more valuable if rendered primarily after the restaurant opened, the team scheduled its arrival in Lewisburg for September 26, 2014, and was on site until October 10. Management estimated that $28,000 in costs was incurred to provide the entire package of “restaurant opening” services.
6. In keeping with the agreement, the restaurant reported the following gross sales in 2014 and 2015 and made the required payments:


Required:
1. Should Big Daddy’s recognize revenue from the initial franchise fee in their quarter ending September 30, 2014? Explain.
2. For Big Daddy’s, prepare summary journal entries for 2014 and 2015 necessitated by this franchiseagreement.


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  • CreatedSeptember 10, 2014
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