Revenue recognition for a franchise. Pickin Chicken Inc. and Country Delight Inc. both sell franchises for their chicken restaurants. The franchisee receives the right to use the franchisor’s products and to benefit from national training and advertising programs. The franchisee agrees to pay $50,000 for exclusive franchise rights in a particular city. Of this amount, the franchisee pays $20,000 on signing the franchise agreement and promises to pay the remainder in five equal annual installments of $6,000 each starting one year after the initial signing payment. Pickin Chicken recognizes franchise revenue as it signs agreements, whereas Country Delight recognizes franchise revenue on an installment basis.
In 2006, each company sold eight franchises. In 2007, each sold five franchises. In 2008, neither company sold a franchise.
(a) Calculate the amount of revenue recognized by each company doing 2006 2012.
(b) When do you think a franchisor should recognize franchise revenue? Why?
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