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Pita Pal sells fast-food franchises. Pita Pal receives $83,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $83,000. Pita Pal also receives $38,400 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2018, and on May 1, 2018 Rachel had completed training and was open for business. How much revenue in 2018 will Pita Pal recognize for its arrangement with Rachel?

Answer :

Answer:

Revenue to be recognized in 2018 year is R83,000

Explanation: In an revenue transaction there five steps to recognizing it.

1. there must be a contract : a contract exist hence the training.

2. There must be performance obligation ( clear obligations to be done by both parties). Rachel will pay for the training pita will provide, Rachel will pay at the end of the year for the use of pita name n ongoing consultation.

3. The must be transaction price, fortunately for us each transaction has a stand alone price.

4.Allocate transaction price to performance obligation, each obligation has its stand alone price already, training = 83000, use and consulting = 38400.

5. Recognize revenue when performance obligation is satisfied and the only satisfied obligation in 2018 is training therefore revenue for 2018 year is 83000

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