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Identifying Performance Obligations and Recording Revenue from Franchise Rights The Krispy Donuts franchise has agreements with 100 franchisees across the United States to operate bakeries. On January 1, 2020, Krispy Donuts grants a franchisee the right to operate a bakery in Minneapolis, Minnesota using the Krispy Donut's brand name, recipe, and other business concepts for a price of $700,000. On January 1, 2020, the franchisee made a down payment to the franchisor of $70,000 and paid the remaining $630,000 upfront fee on March 31, 2020. In exchange for the $700,000 payment, the franchisee received franchise rights, which include benefits of a national advertising campaign over the ten-year period (starting on the contract date) to promote the brand name of Krispy Donuts. The payment also includes the purchase of kitchen equipment from the franchisor (fair value of $84,000), and upfront training and assistance in setting up the franchise (fair value of $28,000). The training and assistance will be performed before the opening of the bakery. Equipment was delivered on April 1, 2020, and had a cost of $56,000. Krispy Donuts uses the residual method to measure the standalone value of the franchise rights. a. How many performance obligations are included in the franchise arrangement? 3 performance obligations b. When does the franchisor recognize revenue for each performance obligation? Sale of equipment Recognize revenue at a point in time - Training and assistance Recognize revenue over time Upfront fee Recognize revenue over time c. Prepare the journal entries for the Krispy Donuts franchisor through the opening of the bakery on June 1, 2020. Date Account Name Dr. Cr. Jan. 1, 2020 Cash 70,000 0 Deferred Franchise Fee Revenue 0 70,000 Mar. 31, 2020 Cash 630,000 0 Deferred Franchise Fee Revenue 0 630,000 Apr. 1, 2020 Deferred Franchise Fee Revenue 84,000 0 Sales Revenue . 0 84,000 To record sale of equipment. Apr. 1, 2020 Cost of Goods Sold 56,000 0 Inventory 0 56,000 To record cost of equipment. June 1, 2020 Deferred Franchise Fee Revenue 28,000 0 Sales Revenue 0 28,000 d. Assuming the franchisor has a December 31 year-end, prepare any journal entries required on December 31, 2020. Date Account Name Dr. Cr. Dec. 31, 2020 Deferred Franchise Fee Revenue 8,680,000 X 0 Sales Revenue 0 8,680,000 x

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