Waterway Inc. charges an initial franchise fee of $91,000. Upon the signing of t
ID: 2554567 • Letter: W
Question
Waterway Inc. charges an initial franchise fee of $91,000. Upon the signing of the agreement (which covers 3 years), a payment of $36,400 is due. Thereafter, 3 annual payments of $18,200 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement is signed on May 1, 2017, and the franchise commences operation on July 1, 2017.
Prepare the journal entries in 2017 for the franchisor under the following assumptions.
(Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 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
(c)
May 1, 2017
Jul. 1, 2017
(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 $2,900) for the period leading up to the franchise opening and for 2 months following opening.Explanation / Answer
Journal Entry in the books of Pandini Ltd. Working note: Computation of Discount on Note Receivable S. No. Account & Explanation Debit Credit Year Particular Payment Made Amount Outstanding Interest 10% PVF@10% Present Value a. Cash $36,400.00 0 Downpayment $36,400.00 $54,600.00 Note Receivable $54,600.00 1 Installment $18,200.00 $36,400.00 $5,460.00 0.909 $4,963.14 Revenue on Franchisee Fees $81,663.40 2 Installment $18,200.00 $18,200.00 $3,640.00 0.826 $3,006.64 Discount on Notes Receivable $9,336.60 3 Installment $18,200.00 $0.00 $1,820.00 0.751 $1,366.82 Total $9,336.60 b. Cash $36,400.00 Unearned Franchise fees $36,400.00 c. Cash $36,400.00 Note Receivable $54,600.00 Revenue on Franchisee Fees $36,400.00 Discount on Notes Receivbale $9,336.60 Unearned Franchisee Fees $45,263.40
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