Question

SMITH Company offers franchises for sale.

It recently agreed a deal with a new Franchisee: JONES COMPANY.

The terms of the deal are as follows:

FRANCHISE FEE PRICE CHARGED TO JONES: CASH $400,000 PLUS NOTE with a Nominal Value of $150,000 and a Present Value (of future cash flows) of $100,000

ALLOCATION OF FRANCHISE FEE PRICE TO SERVICES TO BE PROVIDED BY SMITH TO JONES:

Franchise Fee (for Brand rights/'know how'/exclusive location): 70% of Price Charged to Jones

Training Services: 20% of Price Charged to Jones

Consultancy Fee: 10% of Price Charged to Jones.

The parties met to discuss the terms on 1 September 2018. The deal was finally signed by both parties on 1 January 2019. All services may be assumed to have been provided by 1 April 2019.

Required:

1- Referring only to the Training Services component of the overall, what journal entry should be made by SMITH COMPANY on 1 April 2019?  

Select one:

a. Debit: Service Revenue (Training) $80,000; Credit: Unearned Service Revenue (Training) $80,000

b. None of these answers

c. Debit: Unearned Service Revenue (Training) $80,000; Credit: Service Revenue (Training) $80,000

d. Debit: Unearned Service Revenue (Training) $100,000; Credit Service Revenue (Training) $100,000

e. Debit: Service Revenue (Training) $100,000; Credit: Unearned Service Revenue (Training) $100,000

2- On 31 December 2019, the journal entry for SMITH COMPANY will include which of the following entries? (note: the numerical amounts are not required)   

  

Select one:

a. Debit: Interest Revenue; Credit Cash;

b. Debit Cash: Credit Consultancy Revenue

c. Debit: Cash: Credit: Unearned Consultancy Revenue

d. Debit: Cash; Credit: Interest Revenue

e. None of these answers

3- On 1 January 2019 the journal entry for SMITH COMPANY will include which ONE of the following?

  

Select one:

a. Debit: Cash $400,000; Debit: Note Receivable: $150,000

b. None of these answers

c. Debit: Cash $400,000; Debit: Note Receivable: $100,000

d. Debit: Cash $500,000

e. Debit: Unearned Franchise Revenue: $400,000

Answer 1

1.

Franchise fees received should be recorded at cash received & present value of cash flows.

For smithcompany

Cash received= 400,000

Notes receivable recorded at present value of future cash flows=100,000

In the given case franchise fess should be recorded = 400,000+100,000= $ 500,000

Training service component of Franchise fees= 500,000* 20%= $ 100,000

Entry recorded at initial date when cash is received and note is received is as follows i.e. on september 2018

Journal entry on January 1

Date	General journal	Debit	Credit
January 1 2019	Cash	$ 400,000
	Note receivable	$100,000
	UnearnedService revenue ( francise fee)		$350,000
	Unearned Service revenue(Training)		$100,000

Unearned Service revenue(Consultancy)

$50,000

Franchise fee component= 500,000*70%= $350,000

Training component= 500,000*20%= $ 100,000

Consultancy= 500,000*10%= $ 50,000

We credited all the cash received and nnote received to unearned revenue account as service are not provided yet

Journal entry on April1 by smith company

Date	General journal	Debit	Credit
April 1	Unearned Service revenue (Training)	$ 100,000
	Service Revenue (Training)		$100,000

Correct answer is ''d'' unearned service revenue debited $ 100,000 and service revenue credted $100,000, as serive is now completed and we have earned revenue so we will transfer unearned revenue to SERVICE REVENUE.

2.

On December 31 Cash is received as against interest on Note Receivable\

Journal entry passed is cash is received and interest revenue is credited for january 2019 to december 2019

Correct asnwer is ''d'' Debit cash and credit interest revenue

3.

Date	General journal	Debit	Credit
January 1 2019	Cash	$ 400,000
	Note receivable	$100,000
	UnearnedService revenue ( francise fee)		$350,000
	Unearned Service revenue(Training)		$100,000

Unearned Service revenue(Consultancy)

$50,000

Correct answer is ''C'' Debit cash $ 400,000 and Note receivable $ 100,000

Hope it helps!!

Kindly do give the feedback!!