Question

Pasta Inn charges an initial fee of $2,400,000 for a franchise, with $480,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,521,000. The franchisee has the right to purchase $90,000 of kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectability of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.

Instructions

Prepare the entry to record the initial franchise fee. Show your calculations.

Answer 1

Answer :-

Discount on amount paid at later date =Amount due -present value of amount

= ($2,400,000 - $480,000) - $15,21,000

= $399,000

.

Revenue from Franchise = $2,400,000- $3,99,000 - (90,000+75,000) - (1000× 5 × 12)

= $2,400,000- $3,99,000 - $1,65,000 - $60,000

Revenue from Franchise = $17,76,000

.

Unearned Franchise Fees = (90,000+75,000) + (1000×5×12) = $225,000

Accounts Title and Explanations	Debits	Credit
Dr, Cash	$4,80,000	- - -
Dr, Notes Recievable	$19,20,000	- - -
To, Discounts on Notes Recievable	- - -	$399,000
To, Revenue from Franchise Fees	- - -	$17,76,000
To, Unearned Franchise Fees	- - -	$225,000