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Question 39E-b

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Intermediate Accounting (Kieso)
Found in: Page 1041

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.

Service revenue = $3,600.

Franchise revenue = $35,967.

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Step by Step Solution

Franchise Fee

A franchise fee is a monetary payment made to a franchisor in exchange for the right to utilize the company's name, products, and intellectual property. Depending on the conditions of the franchise agreement, this might be done upfront or on a regular basis.

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 notes receivable a/c

10,433

Unearned service revenue a/c

3600

Unearned franchise revenue a/c

35,967

April 1, 2017

Unearned service revenue a/c

900

Unearned franchise revenue a/c

35,967

Service revenue a/c

900

Franchise revenue a/c

35,967

December 31, 2017

Unearned service revenue a/c

2,700

Service revenue a/c

2,700

December 31, 2017

Discount on notes receivable a/c

3,252

Interest revenue a/c

3,252

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