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Chapter 18: Q38E_1 (page 1042)

E18-38 (LO8) (Franchise Entries) Pacific Crossburgers Inc. charges an initial franchise fee of \(70,000. Upon the signing of the agreement (which covers 3 years), a payment of \)28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement is signed on May 1, 2017, and the franchise commences operation on July 1, 2017.

Instructions

Prepare the journal entries in 2017 for the franchisor under the following assumptions. (Round to the nearest dollar.)

(a) No future services are required by the franchisor once the franchise starts operations.

Short Answer

Expert verified

Both sides of the Journal total$132,860.

Step by step solution

01

Definition of Note Receivable

A written promise received from the customer to whom goods are sold on the account is known as a note receivable. Thewritten promise is made regarding repayment of the amount owed along with interest.

02

Journal entries under assumption that the franchisor requires no future service

Date

Accounts and Explanation

Debit $

Credit $

1 May 2017

Cash

$28,000

Note receivable

$42,000

Discount on note receivable (PVAF: 2.49)

($42,000-$14,000×2.49)

$7,140

Unearned franchise revenue

$62,860

1 July 2017

Unearned franchise revenue

$62,860

Franchise revenue

$62,860

$132,860

$132,860

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Most popular questions from this chapter

(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

On May 1, 2017, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2017. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2017. Eric pays on June 15, 2017, and Mount delivers the product on September 30, 2017. Prepare the journal entries required for Mount in 2017.

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is \(70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits \)65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.
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