CALCULATOR PRINTER VERSION ·BACK NEXCT Exercise 18-38 Pacific Crossburgers Inc.

Question

CALCULATOR PRINTER VERSION ·BACK NEXCT Exercise 18-38 Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement (which covers 3 years), a payment of $28 annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow signed on May 1, 2017, and the franchise commences operation on July 1, 2017. money. The franchise agreement is Prepare the journal entries in 2017 for the franchisor under the following assumptions. (a) No future services are required by the franchisor once the franchise starts operations (b) The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise. (c) The total franchise fee includes training services (with a value of $2,400) for the period leading up to the franchise opening and for 2 months following opening (Credit account titles are automatically indented when the amount is entered. Do not indent manually. I no entry is required, select "No entry" for the account titles and enter O for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g.58,971.) No. Date Account Titles and Explanation Debit Credit (a) May 1, 2017 (b) May 1, 2017

Explanation / Answer

a)

Date

Account

Debit

Credit

May. 01

Cash

28000

Notes Receivable

42000

           Discount on Notes receivable

7184

           Unearned Franchise revenue

62816

July. 01

Unearned Franchise revenue

62816

             Franchise revenue

62816

Discount on notes receivable:

Present value factor @10 % for 3 years: 2.48685. Now discount on notes is {42000 – (14000*2.48685)} = 7184

b)

Date

Account

Debit

Credit

May. 01

Cash

28000

Notes Receivable

42000

           Discount on Notes receivable

7184

           Unearned Franchise revenue

62816

Dec. 31

Unearned Franchise revenue

13960

             Franchise revenue

13960

Unearned franchise revenue: 62816/ 36 months = 1745 * 8 months = 13960.

c)

Date

Account

Debit

Credit

May. 01

Cash

28000

Notes Receivable

42000

           Discount on Notes receivable

7184

           Unearned Service revenue (Training)

2,400

           Unearned Franchise revenue

60416

July. 1

Unearned Service revenue (Training)

1200

Unearned Franchise revenue

60416

               Service revenue (Training)

1200

               Franchise revenue

60416

Sept. 01

Unearned Service revenue (Training)

1,200

               Service revenue (Training)

1,200

Date

Account

Debit

Credit

May. 01

Cash

28000

Notes Receivable

42000

           Discount on Notes receivable

7184

           Unearned Franchise revenue

62816

July. 01

Unearned Franchise revenue

62816

             Franchise revenue

62816

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