Question

Shamrock Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions.

1.		The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $100,000 zero-interest-bearing note is payable with a $20,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of $20,000, each discounted at 8%, is $79,854.
2.		All of the initial franchise fee collected by Shamrock is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise.
3.		In return for the initial franchise fee, Shamrock agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Shamrock helps maintain the brand value of the franchise.
4.		In addition to the initial franchise fee, the franchisee is required to pay to Shamrock a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Shamrock at or below prevailing market prices.

Management of Shamrock Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 8%.

(b) Prepare the journal entries for the initial and continuing franchise fees, assuming: (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.)

(1)		Franchise agreement is signed on January 5, 2017.
(2)		Shamrock completes franchise startup tasks and the franchise opens on July 1, 2017.
(3)		The franchisee records $260,000 in sales in the first 6 months of operations and remits the monthly franchise fee on December 31, 2017.

Please help me solve the following that have question marks. The ones I have listed my answers to are correct.

No.	Date	Account Titles & Explanation	Debit	Credit
1	1/5/2017	Cash	20000
		Notes Receivable	100000
		Discount on Notes Receivable		20146
		Unearned Franchise Revenue		99854
2	7/1/2017	Unearned Franchise Revenue	20000
		Franchise Revenue		20000
3	12/31/2017	Cash	5200
		Franchise Revenue		5200
		(To recognize continuing franchise fees)
	12/31/2017	Unearned Franchise Revenue	7985
		Franchise Revenue		7985
		(To To recognize ongoing fees for brand maintenance)
	12/31/2017	Discount on Notes Receivable	?
		?	?
		?		?
		?		?
		(To recognize collection of note and interest revenue)

*please note, "interest revenue" is NOT correct to recognize collection of note and interest revenue on this last part of the answer!

Answer 1

Amount received from notes receivable at the end of year 1 = 20000

Discounted value of Note Receivable recognised at the time of contract = 20000 X 1/1+0.08 = 18519 (Approx)

So, Journal Entry for the Same is as under:

Bank A/c                                                 Dr.	20000
To Notes Receivable A/c		20000
(Being Notes Receivable Collected)
Discount on Notes Receivable A/c Dr.	1481
To Interest Revenue A/c		1481
(Being notional interest on Notes Receivable transferred to interest revenue account)

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