[mike_terror]

Can someone please help me with the following question, it’s driving me nuts!

On January 3, 2005, Paterson Services, Inc. signed an agreement authorizing Cobb Company to

operate as a franchisee over a 20-year period for an initial franchise fee of $50,000 received when

the agreement was signed. Cobb commenced operations on July 1, 2005, at which date all of the

initial services required of Paterson had been performed. The agreement also provides that Cobb

must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to

Paterson. Cobb’s franchise revenue for 2005 was $400,000. For the year ended December 31,

2005, how much should Paterson record as revenue from franchise fees in respect of the Cobb

franchise?

A) $70,000

B) $50,000

C) $45,000

D) $22,500

Can someone help me with the answer and explanation on why?

[Anonymous]

I'm going to go with $70,000.

I arrived at this number by adding the $50,000 in initial franchise fees (because the question says the franchisor has performed all initial duties) and 20,000 for continuing franchise fees (400,000 x 5%).

[Anonymous]

The $50,000 was earned in 2005 because they completed everything they were supposed to do in July. They also earned continuing Franchise Fee Revenue from the 5% of $400,000, $20,000. For the year their Franchise Fee Revenue is $70,000.

[mike_terror]

Thanks apbandj and Kircket, the correct answer is indeed $70,000.

I understand that $50,000 was earned since they completed everything that they were supposed to do in July.I can also see why 5% of $400,000 ($20,000) is added on as well, making it a total of $70,000.

But what about the $400,000 revenue from 2005? When does this amount get earned / recognized?

[Anonymous]

The $400,000 is recognized by Cobb, the franchisee, in 2005. But the question is asking how much is recognized by Patterson, the franchisor.

[mike_terror]

@apandj

AH!! I SEE IT NOW! I'm hitting myself on the head for not reading the question correctly and paying attention to the little details like the company names!!!

This whole time, I kept thinking, “What about the $400,000?!”, but now I see that the $400,000 belongs to the franchisee, not the franchisor. Thank you!

[Anonymous]

Don't worry – I do that all the time. Like I've read several times on this board, the #1 key to passing is to RTFQ!!

[Author]

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