Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Question 39E-a

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 1040

Short Answer

Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(a) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement.

(b) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of $3,600.

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

Franchise revenue = $39,567.

See the step by step solution

Step by Step Solution

Franchise Agreement

The franchisor authorizes the franchisee to operate a company, market, or distribute products or services that are similar to or linked to the franchisor's trademark. In exchange, the franchisee provides one-time or periodic payments to the franchisor in accordance with the franchise agreement's amount, terms, and conditions.

Journal entries for Campbell for 2017

Date

Particular

Debit ($)

Credit ($)

January 1, 2017

Cash a/c

10,000

Note receivable a/c

40,000

Discount on note receivable a/c

10,433

Unearned franchise fee a/c

39,567

April 1, 2017

Unearned franchise revenue a/c

39,567

Franchise revenue a/c

39,567

December 31, 2017

Discount on notes receivable

3,252

Interest revenue a/c

3,252

Working Notes:

Present value of installment at 11% for 4 years

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.