Question

Don Jackson paid Hungry Hannah’s Hamburgers $54,000 for the right to operate a fast-food restaurant in Thomasville under the Hungry Hannah’s name. Jackson also agreed to pay an operating fee of 0.5% of sales for advertising and other services rendered by Hungry Hannah’s. Jackson began operations on January 2, 2011. Sales for 2011 amounted to $540,000. The finite useful life of the franchise is 40 years.

Give the entries to record the payment of the $54,000 and to record expenses incurred relating to the right to use the Hungry Hannah’s name.

Answer 1

Entries are provided along with description of transaction and simple explanation.

Transaction	Accounts title	Debit	Credit
1. When Franchise rights are purchased	Franchise Assets	$                                   54,000.00
	Cash		$                  54,000.00
	(Cash paid for the use of rights)
2. Entry to record Sales revenue	Cash	$                                 540,000.00
	Sales Revenue		$                540,000.00
	(Sales revenue earned)
3. When payment is made to Franchisor	Franchise Operating Fees	$                                     2,700.00
	Cash		$                     2,700.00
	(payment as part of revenue made: 540000 x 0.5%)
4. Amortisation of Franchise	Amortisation expense - Franchise	$                                     1,350.00
	Accumulated Amortisation - Franchise		$                     1,350.00
	(Expense amortised: 540000 / 40 years)