Franchises'R'Us Corp

Subject:FinancePrice: Bought3

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Franchises'R'Us Corp. (FRU) is a franchisor that owns the rights to Mega Foods (MF). FRU sells MF franchises to the franchisees. Included in the initial franchise package is startup assistance (training) and the required equipment. FRU provides sales and marketing services and operational support to its franchisees on an ongoing basis. The fees for sales and marketing services are based on the annual sales revenue generated by the franchisee. FRU prepares its financial results in accordance with IFRS. The company only prepares adjusting entries and accruals at year end, which is December 31. On January 1, 2021, FRU sold an MF franchise to New Operators Corp. (NOC). Details of this transaction are as follows:

 

1)The franchise agreement entitles NOC to operate an MF outlet for six years (January 1, 2021, to December 31, 2026).

2)NOC was required to pay an initial fee of $380,000 cash on January 1, 2021, and six annual payments of $50,000 due on December 31 each year, with the first payment due on December 31, 2021.

3)On January 1, 2021, FRU delivered the equipment to NOC. The fair market value (stand-alone selling price) of the equipment and training was $475,000.

4)FRU does not offer operational support on a stand-alone basis. FRU's normal costs of providing these services are $20,000 per year. FRU's usual markup on costs for similar services that it provides is 30%.

5)FRU determined that a 6% discount rate appropriately reflects NOC's underlying credit risk. FRU's weighted average cost of capital is 5.5%.

6)FRU determined that the provision of the equipment and training, the operational support, and the sales and marketing services are each distinct performance obligations.

 

Required)

Determine what amount of the initial transaction price will be allocated to revenue for the equipment sales and training performance obligation.