Don Jackson paid Hungry Hannah’s Hamburgers $54,000 for the right to operate a f

Question

Don Jackson paid Hungry Hannah’s Hamburgers $54,000 for the right to operate a fast-food restaurant in Thomasville under the Hungry Hannah’s name. Jackson also agreed to pay an operating fee of 0.5% of sales for advertising and other services rendered by Hungry Hannah’s. Jackson began operations on January 2, 2011. Sales for 2011 amounted to $540,000. The finite useful life of the franchise is 40 years.

Give the entries to record the payment of the $54,000 and to record expenses incurred relating to the right to use the Hungry Hannah’s name.

Explanation / Answer

Entries are provided along with description of transaction and simple explanation.

Transaction Accounts title Debit Credit 1. When Franchise rights are purchased Franchise Assets $                                   54,000.00    Cash $                  54,000.00 (Cash paid for the use of rights) 2. Entry to record Sales revenue Cash $                                 540,000.00 Sales Revenue $                540,000.00 (Sales revenue earned) 3. When payment is made to Franchisor Franchise Operating Fees $                                     2,700.00    Cash $                     2,700.00 (payment as part of revenue made: 540000 x 0.5%) 4. Amortisation of Franchise Amortisation expense - Franchise $                                     1,350.00 Accumulated Amortisation - Franchise $                     1,350.00 (Expense amortised: 540000 / 40 years)

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