Question

Frankie's Homemade Cheese Shop ("Frankie's") signed an advertising agreement with Simmons Boards ("Owner") for billboard advertising rights along Route 33 in the town of Hampton. Frankie's has the right to select and display advertising copy on billboard panels numbered 10 and 12 (panel numbers correspond to designated billboard locations) for a 3-year period from Jan. 1, 20X1, to Dec. 31, 20X3. In consideration for these rights, Frankie's agrees to pay $10,000 in year 1, $12,000 in year 2, and $13,000 in year 3. Assume that Frankie's is required to pay the annual fee on Jan. 1 of each contract year. Assuming Frankie's incremental borrowing rate is 5%, what are the entries Frankie should record at inception of the contract, then at the end of years 1, 2, and 3?

Answer 1

Date	Particulars	Debit $	Credit $
Jan 01 20X1	Right to advertisment (Asset)	$        33,220
	Advertisment expense payable		$        33,220
	[Advertisment contract liability recorded]
Jan 01 20X1	Advertisment expense payable	$        10,000
	Cash		$        10,000
	[Payment for year 1 made]
Dec 31 20X1	Interest expense	$          1,161
	Advertisment expense payable		$          1,161
	[Interest cost @ incremental borrowing rate recorded]
Dec 31 20X2	Interest expense	$             619
	Advertisment expense payable		$             619
	[Interest cost @ incremental borrowing rate recorded]

Working note;

Computation of Advertisment contract present value
Year	Payment	PV factor @5%	Present value
1	$        10,000	1	$                  10,000
2	$        12,000	0.9524	$                  11,429
3	$        13,000	0.907	$                  11,791
	Total		$ 33,220

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