Final answer:
All options provided (continuing franchise fees, interest revenue on future installments, and options to purchase the franchisee's business) can reduce the amount of initial franchise fee recognized as revenue. Portions of the fee could be allocated to various components which need to be accounted for individually according to standard accounting practices.
Step-by-step explanation:
A student asked whether some of the initial franchise fee may be allocated to a) continuing franchise fees, b) interest revenue on the future installments, or c) options to purchase the franchisee's business, and which of these may reduce the amount of the initial franchise fee that is recognized as revenue. The answer is that all of these can reduce the initial franchise fee recognized as revenue. When a franchisee pays an initial franchise fee, this payment is typically for the rights to use the franchisor's brand and business model, as well as for training and support in establishing the business.
However, not all of the initial fee may be recognized as revenue upfront. Portions of the fee could be allocated to continuing franchise fees which are ongoing royalty payments made for continuous support. Some of the fee may also be recorded as interest revenue if the fee is paid over time in installments, recognizing the time value of money. Lastly, the fee might include an option to purchase the franchisee's business in the future, which is another potential allocation of the fee.
Each of these allocations recognizes that the fee covers various separate components, and these components should be accounted for individually when recognizing revenue according to proper accounting standards.