Question

Question # 3 — Franchises.

Pasta Inn charges an initial fee of $2,400,000 for a franchise, with $480,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,521,000. The franchisee has the right to purchase $90,000 of kitchen equipment and supplies for $75,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectability of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.

Instructions

Prepare the entry to record the initial franchise fee. Show your calculations.

Answer 1

Account Titles	Debit $	Credit $
Cash	480,000
Notes Receivable	1,920,000
Discount on Note receivable		399,000
Franchise Revenue		1,926,000
Unearned Franchise Revenue		75,000
Working:
Total Fee		2,400,000
Amount due	1,920,000
Present value of payments	-1,521,000	-399,000
Bargain purchase		-15,000
Advertisinh ( 1,000 x 60 )		-60,000
Revenue from Franchise		$ 1,926,000