On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to op

Question

On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Kingbird Inc. for an initial franchise fee of $46,000. The amount of $9,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $7,400 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 9% for a loan of this type.

Prepare journal entries for Kingbird for 2017-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Kingbird also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of $4,000.

Explanation / Answer

Present vlaue is the amount of unearned franchise revenue.

Present value of franchise payments Annual payment 7,400.00 PVAT(9%,5) 3.88965 Present value 28,783.42 Face value(7400*5) 37,000.00 Discount on note 8,216.58

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