Franchisor Revenue Recognition:
On March 31, Year 1, Maxim Company sold a three-year franchise to an accounting professor
Maxim believes that 30% of its work is done at the time of signing the agreement
and collecting the initial franchise fee.
The remainder of the initial franchise fee is recognized
evenly over the thirty-six months of the franchise agreement.
Over the franchise period, the
franchisor receives 8% of the franchisee’s sales to cover continuing advertising and other
The franchisee’s sales in Years 1-4 were as follows:
$200,000 [9 months]
$100,000 [3 months]
How much should Maxim report in Years 1 and 2 as
total franchise revenue
based on this
[5 Points Each]
Exam continued on next page.
Accounting for Construction Projects:
Marshall Construction Company contracted to construct a bridge in Los Angeles at a price of
$9,200 [for convenience, all numbers refer to thousands of dollars].
Marshall estimated the
bridge would cost $7,100 to build.
In Year 1, Marshall incurred $3,300 costs on the bridge and billed the customer $2,000.
end of Year 1, Marshall estimates that the bridge will have a total cost of $7,400 when
Marshall Company uses the percentage of completion method.
During Year 2, Marshall spends another $1,600 on the bridge and estimates that additional costs
to complete the bridge will be $2,400.
During Year 2 Marshall Company billed the customer
$3,000 and collected $3,800.
During Year 3, Marshall spends another $1,500 on the bridge and estimates that the costs to
complete the bridge will be another $800.
During Year 3 Marshall Company billed the customer
$4,000 and collected $4,000.
In Year 2, what revenues and expenses are recognized on this project?
Also, what is the balance
in the CIP account related to this project on December 31, Year 2?
Where would this project and
its related account appear in the balance sheet of the Marshall Construction Company at the end
of Year 2?
[8 Points Each]
Construction Revenues in Year 2:
Construction Expenses in Year 2: