Accounting for Long-Term Construction Contracts and Franchising: An Outline

Chapter 7Long-Term Construction Contracts and Franchising

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I. IntroductionA. Construction and Franchising Industries

1. Are among the fastest growing industries in the country2. Construction Industries

a. Undeveloped property are converted either as:1. Subdivisions; or2. Condominium Buildings

b. Several roads and bridges are being built in variousparts of the country

3. Franchising Industriesa. Several successful entities grant other entities and

individuals to: 1. Operate using their trade names 2. Sell their products

b. Such an arrangement is called franchisingB. Transactions of a Construction of Company (or Contractor)

and the Franchisor1. Examples

a. Acquisition of Plant Assetsb. Materials c. Payment of Operating Expenses

2. Accounted for in the same manner as those of amanufacturing firm or a merchandising firm

C. Activities of a Construction Company1. Incurrence of Material, Labor, and Overhead Costs2. Billings to Customers3. Collections from Customers4. Recognition of:

a. Revenueb. Cost of Revenuec. Gross Profit

D. Transactions that are Peculiar to the Franchisor 1. Receipt of Initial Franchise Fee2. Rendering of Services to the Franchisee:

a. Initialb. Continuing

II. Long-Term Construction Contracts


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A. Nature and Types of Construction Contracts1. Nature

a. Procedures in a Construction Project1. Contractors are invited to bid for the project;2. The specifications of the project are given to the

bidders;3. Bidders will prepare an estimate of the costs that

will be incurred on the project;4. Bid Price = Cost Estimates + Desired Profit;5. The contract is awarded to the lowest bidder; or the

contractor that bids the lowest contract price basedon the specification submitted by the contracteeor client

b. Construction Contract as Provided in PAS 111. Definition

a. Contract specifically negotiated for theconstruction of an asset (building or a ship) ora combination of assets that are closelyinterrelated or interdependent in terms of their(1) design, (2) technology, (3) function, ortheir ultimate (4) purpose or (5) use [complexpieces of plant or equipment]

b. As stated in paragraph 5:1. Contracts for rendering of services which are

directly related to asset construction, suchasa. Project Managerial Servicesb. Architectural Services

2. Contracts for:a. Asset Destructionb. Asset Restorationc. Environment Restoration Following Asset

Demolition2. Treatment Guidelines (Single or Group)

a. When a contract covers a number of assets, theconstruction of each asset should be treated as a separateconstruction contract when:


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1. Separate proposals have been made for eachasset

2. Each asset has been subject to separatenegotiation and the contractor and thecustomer have been able to accept or rejectthe part of the contract relating to eachasset

3. The costs and revenues of each asset can beidentified

b. A group of contracts, whether with a single customer or withseveral customers, should be treated as a single constructioncontract when:1. The group of contracts is negotiated as a

single package2. The contracts are so closely interrelated that

they are, in effect, part of a single projectwith an overall profit margin

3. The contracts are performed concurrently or ina continuous sequence

c. A contract may provide for the construction of an additional assetat the option of the customer or may be amended to include theconstruction of an additional asset. The construction of anadditional asset when:1. The asset differs significantly in design,

technology or function from the asset orassets covered by the original contract

2. The price of the asset is negotiated withoutregard to the original contract price

2. Typesa. Fixed Price Contract

1. Contractor agrees to a fixed:a. Contact Price; orb. Rate Per Unit of Output

2. In some cases, the agreed upon price or unit rateis subject to cost escalation clauses, which mayprovide for an increase in the original contractprice if (a) prices of construction materials or


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(b) costs of labor increase by a certain percentagesubsequent to contract signing

b. Cost-Plus Contract1. Contractor is reimbursed for:

a. Allowable or otherwise defined costs;b. Plus:

1. A percentage of allowable or otherwise definedcosts; or

2. A fixed fee2. Some contracts, however, contain characteristics of

both types, such as a cost plus contract with anagreed maximum price

B. Contract Revenue and Contract Costs1. Contract Revenue

a. PAS No. 11 defines contract revenue as the initialamount of revenue agreed in the contract andvariations in contract work, claims, and incentivepayments.

b. Composition:1. Bid (Contract) Price

a. Initial amount of revenue agreed in the contract b. Submitted by the contractor during the bidding

process2. Variations in Contract Work

a. Instruction by the customer for a change in thescope of the work to be performed under thecontract

b. It may:1. Increase the original contract revenue2. Decrease the original contract revenue

c. It includes changes in:1. Asset Specifications2. Asset Design3. Contract Duration

d. Included in contract revenue when:


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1. It is probable that the customer will approve(a) the variation and (b) the amount ofrevenue arising from the variation

2. The amount of revenue can be measured reliably3. Claims

a. Amount that the contractor seeks to collect from(1) the customer or (2) another party asreimbursement for costs excluded in the contractprice

b. May arise from:1. Customer Caused Delays2. Disputed Variations in Contract Work3. Errors in:

a. Specificationsb. Design

c. Included in contract revenue when:1. Negotiations have reached an advanced stage

such that it is probable that the customerwill accept the claim

2. The amount of the probable claim can bemeasured reliably

4. Incentive Paymentsa. Additional amount paid to the contractor if

1. Specified Performance Standards are:a. Metb. Exceeded

2. The Contract is Completed Earlyb. Included in contract revenue when:

1. The contract is sufficiently advanced that itis probable that the specified performancestandards will be (a) met or (b) exceeded

2. The amount of incentive payment can bemeasured reliably

2. Contract Costsa. Costs that are incurred in the construction projectb. Contract Cost Groups:

1. Costs that relate directly to the specific contract


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a. Site Labor Costs, including Site Supervisionb. Cost of Materials Used in Productionc. Depreciation of Plant and Equipment Used on the

Contractd. Costs of Moving Plant, Equipment and Materials To

and From the Contract Sitee. Costs of Hiring Plant and Equipmentf. Costs of Design and Technical Assistance that is

Directly Related to the Contractg. Estimated Costs of Rectification and Guarantee

Work, including Expected Warranty Costsh. Claims from Third Parties

2. Costs that are attributable to contract activity ingeneral and can be allocated to the contracta. Insuranceb. Costs of Design and Technical Assistance that is

Indirectly Related to the Contract c. Construction Overheads such as Cost of Preparing

and Constructing Personnel Payroll3. Such other costs as are specifically chargeable to

the customer (reimbursable) under the terms of thecontracta. General Administration Costsb. Development Costs

C. Construction Contract Terminologies 1. Contract Price

a. Price agreed upon by the contractor and the client forthe construction of a specific project

b. Represents Contract Revenue2. Cost Incurred To Date – actual cumulative construction

costs incurred by the contractor from the time theproject started up to a particular balance sheet date

3. Estimated Cost To Completea. Additional construction costs reasonably expected to

be incurred to complete the projectb. Made by engineers at every balance sheet date

4. Total Estimated Cost


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a. Cost Incurred To Date + Estimated Cost to Complete b. Total Estimated Cost upon completion of the project

5. Total Estimated Gross Profita. Contract Price – Total Estimated Cost; where CP > TECb. Excess of contract price over total estimated cost

6. Total Estimated (Anticipated) Lossa. Total Estimated Cost – Contract Price; where TEC > CPb. Excess of total estimated cost over contract price

D. Accounts Used By a Construction Company

Account Title Used Nature of AccountNormalBalance

Construction in Progress Asset (Inventory) DebitAccounts Receivable Asset (Receivable) DebitProgress Billings on Construction Contracts

Liability [Deferred(Unearned) Revenue] Credit

Revenue from Long-Term Construction Contracts Revenue CreditCost of Long-Term ConstructionContracts Expense Debit

E. Construction Activities

To record purchase of construction materialsConstruction Materials xxx

Cash (or Accounts Payable) xxxTo record cost of materials incurred in construction


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Construction in Progress xxxConstruction Materials xxx

To record cost of construction laborConstruction in Progress xxx

Payroll xxxTo record payment of construction overhead costs

Construction in Progress xxxCash xxx

To record other construction overhead costsConstruction in Progress xxx

Accrued Expenses/Various Accounts xxxTo record billings on customers

Accounts Receivable xxxProgress Billings on Construction Contracts xxx

To record collections from customersCash xxx

Accounts Receivable xxx

F. Measurement of Contract Revenue1. Measured at the fair value of the consideration:

a. Received b. Receivable

2. Affected by some uncertainties that depend on the outcomeof future events

3. Estimates may need to be revised as:a. Events occurb. Uncertainties are resolved

4. Some items that affect measurement of revenue, aspreviously discusseda. Variations in Contract Workb. Claimsc. Incentives

G. Recognition of Contract Revenue and Expenses1. PAS no. 11 Guidelines

a. When the outcome of a construction contract can beestimated reliably:1. Use the percentage-of-completion method2. How to tell when construction contract outcomes are

reliably estimable


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(NOTE: ALL CONDITIONS MUST BE SATISFIED)a. Fixed Price Contract

1. Total (a) contract and (b) revenue can bemeasured reliably

2. It is probable that the economic benefitsassociated with the contract will flow to theenterprise (i.e., there is reasonableassurance as to the collectability of thecontract price)

3. Both (a) the contract costs to complete thecontract and (b) the stage of completion atthe statement of financial position date canbe measured reliably

4. The contract costs attributable to thecontract can be (a) clearly identified and (b)measured reliably so that actual contractcosts incurred can be compared with priorestimates

b. Cost-Plus Contract1. It is probable that the economic benefits

associated with the contract will flow to theenterprise (i.e., there is reasonableassurance as to the collectability of thecontract price)

2. The contract costs attributable to thecontract, whether or not specificallyreimbursable, can be clearly identified andmeasured reliably

b. When the outcome of a construction contract cannot beestimated reliably:1. Use the cost recovery method2. Revenue should be recognized only to the extent of

contract costs incurred that it is probable will berecoverable

3. Contract costs should be recognized as expense inthe period in which they are incurred


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c. The completed contract method is not generally acceptedunder PAS No 11

2. Percentage-of-Completion Methoda. Recognition Guidelines

1. Contract Revenue, Cost of Contract Revenue, and Gross Profit a. Recognized by contractor as the work progresses

proportionate to the work completedb. Recognized as revenue (expense) in the income

statement in the accounting period in which thework is performed (related revenue is recognized)

2. Anticipated loss a. Should be recognized in full in the period it is

determinedb. Occurs when Contract Price < Total Estimated Cost

3. Operating expenses – recognized in the incomestatement in the period they are incurred

b. Determining the Percentage of Completion of the Contract1. Input Method

a. Also known as Cost-to-cost Methodb. The proportion that contract costs incurred for

work performed to date bear to the estimatedtotal contract costs

c. Most popular method whereby the basis ofmeasurement is the ratio of cost incurred to dateto the total estimated cost

d. Cost of revenue is equal to actual cost incurred 2. Output Method

a. Also known as Architect’s or Engineer’s Estimatesb. Based on:

1. Surveys of work performed2. Completion of a physical proportion of the

contract workc. Cost of revenue may not equal actual cost

incurredc. Procedures Followed in Applying the Percentage-of-Completion Method

(At the End of Each Accounting Period)


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1. A schedule is prepared showing the total estimatedcosts, total estimated gross profit (loss), and thepercentage of completion

First YearSubsequent

Year/s Final Yeara. Contract Price

Pxxx

Pxxx

Pxxx

b. Cost Incurred To Date

Pxxx

Pxxx

Pxxx

c.

Estimated Cost To Complete xxx xxx xxx

d.

Total Estimated Cost (b+ c)

Pxxx

Pxxx

Pxxx

e.

Total Estimated Gross Profit (Loss) [a - d]

Pxxx

Pxxx

Pxxx

f.

Percentage of Completion (b ÷ d) xxx% xxx% xxx%

2. A schedule is prepared showing the computation ofrevenue, cost of revenue, and gross profit to berecognized

To DateRecognized inPrior Year/s

To BeRecognized inCurrent Year

First Year

Recognized RevenueP

xxx -P

xxxCost of Revenue xxx - xxx

Gross Profit (Loss)P

xxx -P

xxx

Subsequent Year/s

Recognized RevenueP

xxxP

xxxP

xxxCost of Revenue xxx xxx xxx


xxxP

xxxP

xxx


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Final Year

Recognized RevenueP

xxxP

xxxP

xxxCost of Revenue xxx xxx xxx


xxxP

xxxP

xxx

(a) Recognized Revenue = Contract Price x Percentage of Completion(b) Cost of Revenue =

Total Estimated Cost x Percentage of Completion

(c) Gross Profit (Loss) =

Gross Profit (Loss) x Percentage of Completion, or (a) - (b)

3. A journal entry is prepared to record:a. Revenue, Cost of Revenue, and Gross Profit (Loss)

recognized for that periodb. Upon completion of the project, to close the

balances of:1. Construction in Progress2. Progress Billings on Construction Contracts

To record recognized revenue, cost of revenue, and gross profitCost of Long-Term Construction Contracts (Cost of Revenue) xxxConstruction in Progress (Realized Gross Profit) xxx

Revenue from Long-Term Construction Contracts (Recognized Revenue) xxxTo record recognized revenue, cost of revenue and anticipated loss

Cost of Long-Term Construction Contracts (Cost of Revenue) xxxConstruction in Progress (Full Anticipated Loss) xxxRevenue from Long-Term Construction Contracts (Recognized Revenue) xxxTo close the balances of construction in progress and progress

billings on construction contractsProgress Billings on Construction Contracts (Total Contract Price) xxx

Construction in Progress [Total Cost of Revenue + Gross Profit ( - AnticipatedLoss)] xxx

d. Key Theories1. The Construction in Progress account


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a. The gross profit (loss) recognized each year isdebited (credited) to the account, therebyincreasing (decreasing) its balance

b. Balance:1. Is composed of:

a. Cost incurred to dateb. Gross profit (loss) to date

2. Also represents the revenue to date 2. The amount of revenue, cost of revenue, and gross

profit (loss) to be recognized in the current yearare the respective balances to date less the amountrecognized in prior year/s. In the case theanticipated losses, immediate recognition (orrecognition in full) is required

3. Upon completion of the project and full billings tothe customer, the balance of the Progress Billingson Construction Contract will be equal to the totalcontract revenue. On one hand, the balance of theConstruction in Progress account will also equal tothe total contract revenue since both contractcosts and gross profit (loss) on the contract arerecorded in the account. The balances of these twoaccounts relating to a particular project must beclosed upon completion of such project

e. Financial Statement Presentation and Disclosures1. Financial Statement Presentation

a. Since the operating cycle of a constructioncompany that emphasizes long-term constructioncontracts is generally more than one year, thestatement of financial position (balance sheet)accounts related to construction activities areclassified as current

b. Accounts Receivable is reported as a currentasset

c. Balance of Construction in Progress and ProgressBillings on Construction Contracts


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1. Are reported net, either as current asset oras current liability

2. When the balance of Construction in Progressis more than (less than) the balance of theProgress Billings on Construction Contractsaccount, they are reported under the currentassets (liabilities) section

3. The balances of the two accounts forindividual projects must be determined forproper financial statement presentation

4. A net debit balance in one project must not beoffset against a net credit balance in anotherproject

2. Disclosures (either parenthetically or in thenotes, as required by PAS No 11)a. Amount of:

1. Contract revenue recognized as revenue in theperiod

2. Advances received for each contract inprogress

3. Retentions [amount of progress billings which are notpaid until (a) the satisfaction of conditions specified in thecontract for payment of such amounts or until (b) defectshave been rectified] for each contract in progress

b. Methods Used To Determine:1. Contract revenue recognized in the period2. Stage of completion of contracts in progress

c. Aggregate Amount of:1. Costs Incurred To Date For Each Contract in

Progress2. Recognized Profit (Less Recognized Losses) To

Date For Each Contract in Progressf. Anticipated Loss on Long-term Construction Contracts

1. When it is probable that total contract costs for aparticular project will exceed total revenue, theexpected or anticipated loss should be recognized


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as expense immediately, that is, in the period itis determined

2. PAS No. 11, paragraph 37 provides that the amountof loss is determined irrespective of:a. Whether or not work has commenced on the contractb. The stage of completion of contract activityc. The amount of profits expected to arise on other

contractsg. Accounting For Contract Change Orders

1. Contract Change Ordersa. Instances when modifications in the original

contract price are made as intended by either (a)the contractor or (b) the customer

b. Include Changes in:1. Specifications 2. Designs3. Method of Performance4. Manner of Performance5. Facilities6. Equipment7. Materials8. Etc.

2. Accounting Treatmenta. Affected elements:

1. Contract Price2. Cost of Construction

b. Considered as changes in estimates that willaffect:1. Current Period2. Current and Future Periods

3. Cost Recovery Methoda. Used when the outcome of a contract cannot be

estimated reliablyb. Revenue is recognized only to the extent of the

contract costs incurred that is probable of recovery(may be < actual cost incurred to date)


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1. If Actual Cost Incurred To Date > Probably Recoverable ContractCosts, the difference would be recognized as a loss

2. If Actual Cost Incurred To Date < Probably Recoverable ContractCosts, the difference would be ignored sincerecognizing such would lead to a gross profit,which would violate the cost recovery (zero-profit)method

c. Examples of circumstances in which the recoverabilityof contract costs may not be probable, as enumeratedby PAS No. 111. Contracts which are not fully enforceable, that is,

their validity is seriously in question2. Contracts in which their completion is subject to

the outcome of pending litigation or legislation3. Contracts relating to properties that are likely to

be condemned or expropriated4. Contracts wherein customers are unable to meet

their obligations5. Contracts where contractor is unable to complete

the contract or otherwise meet its obligationsunder the contract

d. When the uncertainties that prevented the reliableestimation of the outcome of the contract no longerexist, revenue and expenses associated with theconstruction contract should be recognized using thepercentage-of-completion method

e. Journal entries for the cost recovery method is thesame as in percentage-of-completion method, except forthe amount of revenue and profit to be recognized

III. FranchisingA. Has been one of the fastest growing retail businessB. Franchisor

1. Establishments which create faster growth by sellingrights for the use of their:a. Patentsb. Secret Processesc. Trade Names


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d. Products2. Examples:

a. Jollibeeb. McDonald’s c. Shakey’sd. Mercury Druge. Goldilocksf. Mini-Stopg. Chowkingh. Pizza Hut

C. Franchisee1. Buys the rights sold by the franchisor2. Operate their own units as independent organizations

D. Initial Franchise Fee – payment by the franchisee for:1. Establishing the franchise relationship2. Providing some initial services as operation goes on:

a. Conduct of Market Studiesb. Training of Employeesc. Finding a Suitable Location d. Sale of Product

E. Major Accounting Issues Relating to Sale of Franchise Right1. Initial franchise fee received by the franchisor2. Cost incurred prior to opening of the franchise outlet3. Payment of continuing franchise fee4. Sale of goods by the franchisor to the franchisee

F. Accounting for Franchise Fee and Related Cost of Revenue (based on FASBStatement No. 45 and IAS No. 18)1. Substantial performance of services

a. Occur when the franchisor has:1. No obligation to

a. Refund any cash receivedb. Excuse any nonpayment of a note

2. Performed all the initial services required underthe contract

b. As provided by FASB Statement No. 45, the earliestpoint at which substantial performance has occurred iswhen the operation of the franchisee has commenced


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unless it can be demonstrated that substantialperformance of all obligations, including servicesrendered voluntarily, has occurred before that time

2. Prior to substantial performance of services - DepositMethoda. Franchise fee received by the franchisor is:

1. Paid in lump-sum2. Treated as a deposit, which may be refunded (should

the franchise agreement be canceled for one reason or another) ina. Wholeb. Part

3. Recorded as a deferred revenueb. Costs incurred are recorded as deferred costc. Pro-forma journal entries:

To record signing of franchise agreementCash, etc. xxx

Unearned Franchise Fee (at fair value of consideration received) xxxTo record initial cost incurred and/or additional cost of services

Deferred Franchise Cost xxxCash, etc. xxxTo record the franchise revenue and cost of franchise revenue

(opening of franchise outlet)Unearned Franchise Fee xxx

Franchise Fee Revenue (balance of Unearned Franchise Fee) xxx

Cost of Franchise Fee Revenue (balance of Deferred Franchise Cost) xxxDeferred Franchise Cost xxx

3. Upon substantial performance of servicesa. The initial franchise fee is:

1. Paid in installments2. Considered earned

b. Deferred revenue must be transferred to earned revenueaccount

c. Full Accrual Method1. Used when collection of the unpaid fee is reasonably

assured


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2. Pro-forma journal entries:d. Installment Sales Method

1. Used when collection of the unpaid fee is notreasonably assured

2. Pro-forma journal entries:

To record signing of franchise agreementCash, etc. xxxNotes Receivable (face value) xxx

Discount on Notes Receivable (face value - present value) xxxUnearned Franchise Fee (at fair value of consideration

received) xxxTo record installment payment/s and to amortize discount

Cash (periodic installment) xxxDiscount on Notes Receivable (cv of note x implicit rate x time) xxx

Interest Revenue (discount amortization) xxxNotes Receivable (periodic installment - discount amortization) xxx

To record initial cost incurred and/or additional cost of servicesDeferred Franchise Cost xxx

Cash xxxTo record the franchise revenue and cost of franchise revenue

(opening of franchise outlet)Unearned Franchise Fee xxx

Franchise Fee Revenue (balance of Unearned Franchise Fee) xxxCost of Franchise Fee Revenue (balance of Deferred Franchise Cost) xxx

Deferred Franchise Cost xxxTo record deferred gross profit

Franchise Fee Revenue (recognized amount) xxxDeferred Gross Profit on Franchise (difference) xxx

Cost of Franchise Fee Revenue (recognized amount) xxxTo record realized gross profit

Deferred Gross Profit on Franchise (realized gross profit) xxxRealized Gross Profit on Franchise xxx

Down payment (if any) P xxxInstallment Applied to Principal:

Periodic InstallmentP

xxxInstallment Applied to Interest/Discount Amortization ( xxx) xxx

Total Collections P xxxMultiply by Gross Profit Rate:


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Gross ProfitP

xxxDivided by Franchise Fee Revenue/Cost of Franchise Fee

Revenue÷

xxx x xxx%Realized Gross Profit P xxx

4. Special Rulesa. If (1) the probability of refunding the initial

franchise fee is extremely low, (2) the amount offuture services to be provided to the franchisee isminimal, (3) collectability of the note is reasonablyassured, and (4) substantial performance has occurred,the total franchise fee (that is, the down payment and thepresent value of unpaid franchise fee) is recorded asrevenue immediately

b. If (1) the initial down payment is (a) not refundableand (b) it represents a fair measure of the servicealready provided, with (2) a significant amount ofservices still to be performed by the franchisor infuture periods, and (3) collectability of the note isreasonably assured, the down payment is recorded asrevenue and the present value of the unpaid franchise fee isrecorded as deferred (unearned) revenue

c. If (1) the initial down payment is not refundable and(2) no future services are required by the franchisor,but (3) collection of the note is uncertain, the downpayment is recorded as a revenue and the note may notbe recorded

d. If (1) the initial down payment is refundable or (2)substantial services are yet to be performed and (3)the collection of the note is uncertain, the downpayment is recorded as unearned revenue and the note maynot be recorded

G. Accounting For Other Franchise Fees (as provided by PAS No. 18)1. Supplies of Equipment and Other Tangible Assets – the

amount, based on the fair value of the assets sold, is


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recognized as revenue when the items are delivered ortile passes

2. Supplies of Initial and Subsequent Servicesa. Fees for the provision of continuing services, whether

(1) part of the initial fee or (2) a separate fee arerecognized as revenue as services are rendered

b. When the separate fee does not cover the cost ofcontinuing services together with a reasonable profit,part of the initial fee, sufficient to cover (1) thecosts of continuing services and (2) to providereasonable profit on those services, is deferred andrecognized as revenue as the services are rendered

c. When the terms of the franchise agreement allows thefranchisee to obtain equipment, inventories or othertangible assets at a bargain purchase price [that is, (1)at a price lower than that charged to others or (2) aprice that does not provide a reasonable profit onthose sales]1. Part of the initial fee , sufficient to (a) cover

estimated costs in excess of that price and (b) toprovide a reasonable profit on those sales, isdeferred and recognized over the period the goodsare likely to be sold to the franchisee

2. The balance of the initial fee is recognized asrevenue when performance of all the initialservices and other obligations required of thefranchisor has been substantially completed

3. Continuing Franchise Fee – fees charged for the use ofcontinuing rights granted by the agreement, or for otherservices provided during the period of the agreement, arerecognized as revenue as the services are provided or therights are used

4. Agency Transactionsa. Transactions may take place between the franchisor and

the franchisee which, in substance, involve thefranchisor acting as agent for the franchisee, such as


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(1) the ordering of supplies and (2) arranging fortheir delivery to the franchisee at no profit

b. Such transactions do not give rise to revenue H. Repossession (Reacquisition) of Franchise

1. Franchise Fee Is Refundeda. Accounting treatment is equivalent to a cancellation

of original saleb. Revenue previously recognized is reported as a

reduction in revenue of the current period in whichthe franchise is repossessed (reacquired)

2. Franchise Fee Is Not Refundeda. No adjustment is requiredb. If a balance is still owed by the franchisee:

1. The Allowance for Uncollectible Accounts related tothe transaction should be reviewed

2. Any deferred revenue on the original sale shouldnow be recognized in full

Accounting for Long-Term Construction Contracts and Franchising: An Outline

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