Douglas Diners Inc. charges an initial franchise fee of $90,000 broken down as follows:

Rights to trade name, market area, and proprietary know-how$40,000

Training services11,500

Equipment (cost of $10,800) 38,500

Total initial franchise fee$90,000

Upon signing of the agreement, a payment of $40,000 is due. Thereafter, two annual payments of $30,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2014, and the franchise commences operation on November 1, 2014. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 2014 would include

a. a credit to Unearned Franchise Revenue for $40,000.

b. a credit to Service Revenue for $11,500.

c. a credit to Sales Revenue for $38,500.

d. a debit to Unearned Franchise Revenue for $40,000.

Question

Willow Short

Business

28 September, 22:23

Douglas Diners Inc. charges an initial franchise fee of $90,000 broken down as follows:

Rights to trade name, market area, and proprietary know-how$40,000

Training services11,500

Equipment (cost of $10,800) 38,500

Total initial franchise fee$90,000

Upon signing of the agreement, a payment of $40,000 is due. Thereafter, two annual payments of $30,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 2014, and the franchise commences operation on November 1, 2014. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 2014 would include

a. a credit to Unearned Franchise Revenue for $40,000.

b. a credit to Service Revenue for $11,500.

c. a credit to Sales Revenue for $38,500.

d. a debit to Unearned Franchise Revenue for $40,000.

+2

Answers (1)

Know the Answer?

Danielle Galvan · Answer 1

b. a credit to Service Revenue for $11,500.

c. a credit to Sales Revenue for $38,500.

Explanation:

The customer pays 40,000 then we solve for the present value of the future payments

30,000 / 1.08 + 30,000/1.08^2 = $ 53,497.94

Is is the amount net of interest that the company is charging the franchisee

The entry would be as follows

Cash 40,000 debit

account receivables 53,497.94 debit

Sales Revenue 38,500 credit

Service Revenue 11,500 credit

Franchise Fee * 53,497.94 credit

As the fanchisee will not recieve further support from the franchisor It is already earned If the franchisee will receive support over the two year period then This would be unearned as the Franchisor has to provide assistance over the years to earned.