Franchises‘R’Us Corp. – My Blog

se the following information to answer questions 1 to 3. Round all percentages to one

AssignmentTutorOnline

decimal place (for example, 45.2%).

Franchises‘R’Us Corp. (FRU) is a franchisor that owns the rights to Mega Foods (MF). FRU

sells MF franchises to the franchisees. Included in the initial franchise package is startup

assistance and the required equipment. FRU provides sales and marketing services and

operational support to its franchisees on an ongoing basis. The fees for sales and marketing

services are based on the annual sales revenue generated by the franchisee.

FRU prepares its financial results in accordance with IFRS. The company only prepares

adjusting entries and accruals at year end, which is December 31.

On January 1, 20X3, FRU sold an MF franchise to New Operators Corp. (NOC). Details of

this transaction are as follows:

* The franchise agreement entitled NOC to operate an MF outlet for six years (January 1,

20X3, to December 31, 20X8).

* NOC was required to pay an initial fee of $380,000 cash on January 1, 20X3, and six

annual payments of $50,000 due on December 31 each year, with the first payment due

on December 31, 20X3.

* On January 1, 20X3, FRU delivered the equipment to NOC. The fair market value (standalone selling price) of the equipment and startup assistance was $475,000.

* FRU does not offer operational support on a stand-alone basis. FRU’s normal costs of

providing these services are $20,000 per annum. FRU’s usual markup on costs for similar

services that it provides is 30%.

* FRU determined that a 6% discount rate appropriately reflects NOC’s underlying credit

risk.

* FRU determined that the provision of the equipment and startup assistance, the

operational support and the sales and marketing services are each distinct performance

obligations.

1. What amount of the initial transaction price will be allocated to revenue for the equipment

sales and provision of startup assistance performance obligation?

a) $471,277