Question

Novak Inc. charges an initial franchise fee of $66,000. Upon the signing of the agreement (which covers 3 years), a payment of $26,400 is due. Thereafter, 3 annual payments of $13,200 are required. The credit rating of the franchisee is such that it would have to pay interest at 9% to borrow money. The franchise agreement is signed on May 1, 2020, and the franchise commences operation on July 1, 2020.

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Prepare the journal entries in 2020 for the franchisor under the following assumptions.

(a)		No future services are required by the franchisor once the franchise starts operations.
(b)		The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise.
(c)		The total franchise fee includes training services (with a value of $2,600) for the period leading up to the franchise opening and for 2 months following opening.

(c)

Answer 1

Journal entries

Date	Particulars	Debit	Credit
May 1	Cash	$26,400
2020	Notes Receivable ($66,000 − $26,400)	$39,600
	Discount on Notes Receivable $39,600 − ( $13,200 × 2.53129)		$6,187
	Unearned Franchise Revenue ($26,400 + $39,600 − $6,187)		$59,813
	To record advance for franchise received
Jul 1	Unearned Franchise Revenue	$59,813
2020	Franchise Revenue		$59,813
	To record franchise revenue earned

Notes: Present value of ordinary annuity of $1 is 2.53129 when i = 9% and n = 3.

Journal entries

Date	Particulars	Debit	Credit
May 1	Cash	$26,400
2020	Notes Receivable ($66,000 − $26,400)	$39,600
	Discount on Notes Receivable $39,600 − ( $13,200 × 2.53129)		$6,187
	Unearned Franchise Revenue ($26,400 + $39,600 − $6,187)		$59,813
	To record advance for franchise received
Dec 31	Unearned Franchise Revenue ($59,813 ÷ 3 years) × 8 months ÷ 12 months	$13,291
2020	Franchise Revenue		$13,291
	To record franchise revenue earned

Journal entries

Date	Particulars	Debit	Credit
May 1	Cash	$26,400
2020	Notes Receivable ($66,000 − $26,400)	$39,600
	Discount on Notes Receivable $39,600 − ( $13,200 × 2.53129)		$6,187
	Unearned Service Revenue		$2,600
	Unearned Franchise Revenue ($26,400 + $39,600 − $6,187 − $2,600)		$57,213
	To record advance for franchise received
Jul 1	Unearned Service Revenue ($2,600 ÷ 2 months)	$1,300
2020	Unearned Franchise Revenue	$57,213
	Franchise Revenue		$57,213
	Service Revenue		$2,600
	To record franchise and service revenue earned
Sep 1	Unearned Service Revenue	$1,300
2020	Service Revenue		$1,300
	To record service revenue earned