Sage Inc. charges an initial franchise fee of $66,000. Upon the signing of the a
ID: 2569321 • Letter: S
Question
Sage Inc. charges an initial franchise fee of $66,000. Upon the signing of the agreement (which covers 3 years), a payment of $26,400 is due. Thereafter, 3 annual payments of $13,200 are required. The credit rating of the franchisee is such that it would have to pay interest at 9% 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. (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 $2,600) for the period leading up to the franchise opening and for 2 months following opening.
Explanation / Answer
a. In case no further services are required the revenue is earned but it is collected over an extended period of time cost recovery method is used to recognise revenue, means revenue is recognised as and when collected.
Entry:
b. Present value of service revenue related to future services recorded as unearned revenue and recognised as when substantially all services are performed.
Present value of 3 annual payments of 13200 at 9% annual rate plus downpayment 26400= 13200* 2.5313 +26400= 59814
Discount= 66000-59814= 6186
Entry:
c.
S No Account Debit Credit a Notes receivables 39,600 Cash 26,400 Franchise revenue 26,400 Unearned franchise revenue 39,600 [ Franchise agreemetn signed] Cash 13,200 Notes receivables 13,200 Unearned franchise revenue 13,200 Franchise revenue 13,200 [Year end franchise payment received]Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.