1. Tum’s Pizza Inc.

enters into a franchise agreement on December 31, 2022, giving Food Fight
Corp. the right to operate as a franchisee of Tum’s Pizza for 5 years. Tum’s charges Food
Fight an initial franchise fee of $50,000 for the right to operate as a franchisee. Of this
amount, $20,000 is payable when Food Fight signs the agreement, and the note balance is
payable in five annual payments of $6,000 each on December 31. As part of the arrangement,
Tum’s helps locate the site, negotiate the lease or purchase of the site, supervise the
construction activity, and provide employee training and the equipment. Similar training
services and equipment are sold separately.

Food Fight also promises to pay ongoing royalty payments of 1% of its annual sales (payable
each January 31 of the following year) and is obliged to purchase products from Tum’s at its
current standalone selling prices at the time of purchase. The credit rating of Food Fight
indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five
annual receipts of $6,000, each discounted at 8%, is $23,957. The discount of $6,043
represents the interest revenue to be accrued by Tum’s over the payment period.

Question: What are the performance obligations in this arrangement and the point in time
at which the performance obligations for Tum’s are satisfied and revenue is recognized?

To illustrate the accounting for this franchise, consider the following values for allocation of
the transaction price at December 31, 2022.

Rights to the trade name, market area, and proprietary know-how $20,000
Training services 9,957
Equipment (cost of $10,000) 14,000
Total transaction price $43,957
 Training is completed in January 2023, the equipment is installed in January
2023, and Food Fight holds a grand opening on February 2, 2023.
 During 2023, Food Fight does well, recording $525,000 of sales in its first year of
operations.
Franchise Revenue over Time

2. Tech Solvers Corp. is a franchisor in the emerging technology consulting service business.
Tech Solvers’ stores provide a range of computing services (hardware/software installation,
repairs, data backup, device syncing, and network solutions) on popular Apple and PC
devices. Each franchise agreement gives a franchisee the right to open a Tech Solvers store
and sell Tech Solvers’ products and services in the area for 5 years. Under the contract, Tech
Solvers also provides the franchisee with a number of services to support and enhance the
franchise brand, including (a) advising and consulting on the operations of the store; (b)
communicating new hardware and software developments, and service techniques; (c)
providing business and training manuals; and (d) providing advertising programs and
training. Largely a service operation (all parts and other supplies are purchased as needed by
customers), Tech Solvers provides few upfront services to franchisees. Instead, the franchisee
recruits service technicians, who are given Tech Solvers’ training materials (online manuals
and tutorials), which are updated for technology changes on a monthly basis at a minimum.
Tech Solvers enters into a franchise agreement on December 15, 2022, giving a franchisee
the rights to operate a Tech Solvers franchise for 5 years. Tech Solvers charges an initial
franchise fee of $5,000 for the right to operate as a franchisee, payable upon signing the
contract. Tech Solvers also receives ongoing royalty payments of 7% of the franchisee’s
annual sales (payable each January 15 of the following year). The franchise begins operations
in January 2023 and recognizes $85,000 of revenue in 2023.
Question: What are the performance obligations in this arrangement and the point in time
at which the performance obligations will be satisfied and revenue will be recognized?