Question

Sunland Inn charges an initial fee of $ 2,448,000 for a franchise, with $ 489,600 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $ 1,551,000. The franchisee has the right to purchase $ 91,800 of kitchen equipment and supplies for $ 76,500. An additional part of the initial fee is for advertising to be provided by Sunland Inn during the next five years. The value of the advertising is $ 1,020 a month. Collectibility of the payments is reasonably assured and Sunland Inn has performed all the initial services required by the contract.

Prepare the entry to record the initial franchise fee

Answer 1

Total initial  fee	$2,448,000
Less: Discount ( W.N 1 )	($407,400 )
Bargain purchase option ( 91,800 -76,500 )	($15,300)
Advertising (60 x $ 1,020)	($61,200)
Revenue from franchise	$1,964,100

 

Discount = Initial fee - amount paid in initially - Present value of annual payments

                = ($2,448,000 - $ 489,600 ) -  1,551,000

                 = $1,958,400 - 1,551,000

                 = $407,400

 

General Journal	Debit	Credit
Cash	$489,600
Notes Receivable [ 2,448,000 -489,600 ]	$1,958,400
Discount on Notes Receivable		$407,400
Revenue from Franchise Fees		$1,964,100
Unearned Franchise Fees		$76,500

 

Discount = Initial fee - amount paid in initially - Present value of annual payments

                   = ($2,448,000 - $ 489,600 ) -  1,551,000

                 = $1,958,400 - 1,551,000

                 = $407,400