Intangible Assets Accounting (Franchise Contract, Capitalization, Amortization, Fee Expenses)



Accounting for a franchise (licensing agreement) as an intangible asset, Contract Related: (franchise & licensing agreements, construction permits, broadcast rights, and service or supply contracts),1-Amortize the cost of a franchise (or license) with limited life as operating expense over the life of the franchise, 2-Do not amortize with an indefinite life nor a perpetual franchise, instead carry such franchise at cost on balance sheet, based onFranchise example: On 1/1/20X1 Corp-A entered an agreement to operate a franchise of ABC Services for an initial franchise fee of $150,000, of this amount $30,000 was paid when agreement was signed and the balance is payable in (4) annual payments $30,000 discounted at 14% (PV = $87,411), the agreement also provides a 5% revenue from the franchise to the franchisor annually, revenue from the franchise during 20X1 was $1,800,000, useful life of franchise estimated at 10 years, for this example the franchise cost is the present value of the four payments of $30,000 each plus the initial payment of $30,000 = 117,411, the amortization per year is this amount divided by the useful life of 10 years, there is also a yearly franchise fee, detailed calculations by Allen Mursau

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