Franchise Accounting

Question 1

How to calculate total Franchise expenses?

Franchisee’s perspective in paying and expense franchise expense

Answer 1

Example:
$80,000 franchise fee
$20,000 cash advance payment
Remaining balance via PV factor of payments is $47,300 (paid over 10 years)
Franchise fee to pay to Franchisor is 5% of operating revenues (operating revenues is $100,000)
Imputed interest rate on unpaid balance is 12%

(a) Amortized franchise expense:
$20,000 down payment
\+ 47,300 PV installment payments
---------------------
= $67,300 Capitalized Franchise 

Amortization:
$67,300 / 10 years = $6,730 Amortized expense

(b) Franchisee fee (on operating revenues):

$100,000 x 0.05 = $5,000

(c) Interest imputed on unpaid balance:

PV of installments x Imputed interest

$47,300 x 12% interest imputed = $5,676 interest expense.

then:
$6,730 Amortized expense
$5,000 franchise fee
\+ $5,676 interest expense
= $17,406 Total Franchise Expense

Question 2

When all Franchisor’s services done to the franchisee, then recognize earned revenue or recognize unearned revenue?

Answer 2

Franchisor’s services done/finished to franchisee

Recognize earned revenue via:

Entire Paid amount = earned revenue

Dr Cash
Cr Franchisee Fee Revenue

Question 3

When all Franchisor’s services NOT done to the franchisee, then recognize earned revenue or recognize unearned revenue?

Answer 3

Recognized unearned revenue via Paid cash at signing
+ PV on note receivable
———————
= unearned revenue