A303 Name/ Class Packet 5 E5-15 Tech Morris Inc. sells franchise arrangements th

Question

A303 Name/ Class Packet 5 E5-15 Tech Morris Inc. sells franchise arrangements throughout the United States and nada. Under a franchise agreement, Morris receives $1,200,000 in exchange for satisfying the following separate performance obligations: (1) franchisees have a five-year right to operate as a Tech Morris retail establishment in an exclusive sales erritory, (2) franchisees receive initial training and certification as a Computer Mechanic, and (3) franchisees receive a Tech Morris building and necessary equipment. The stand-alone selling price of the initial training and certification is $30,000, and $900,000 for the building and equipment. Morris estimates the stand- alone selling price of the five-year right to operate as a Tech Morris establishment using the residual approach. Ca Morris received $150,000 on July 1, year 1, from Conners and accepted a note receivable for the rest of the franchise price. Morris will construct and equip Conners' building and train and certify Conners by September 1, and Conners' five- year right to operate as a Tech Morris establishment will commence on September 1 as well. Required: 1. 2. 3. What amount would Morris calculate as the stand-alone selling price of the five-year right to operate as a Tech Morris retail establishment? What journal entry would Morris record on July 1, year 1, to reflect the sale of a franchise to Conners? How much revenue would Morris recognize in the year ended December 31, year 1, with respect to its franchise arrangement with Conners? (Ignore any interest on the note receivable.)

Explanation / Answer

1. Total transaction price for the 3 performance obligations 1200000 Stand-alone selling price for initial training & certfication 30000 Stand-alone selling price for building & equipment 900000 Total 930000 So, Stand-alone selling pric eof the 5-Year right to operate as a Tech Morris establishment(1200000-930000) 270000 2.. Cash 150000 Note receivable(1200000-150000) 1050000 Revenue 30000 Deferred revenue 1170000 3.. Deferred revenue 918000 Revenue 918000 (900000+(270000/60mths.*4 months))

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