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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

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.

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.

Explain the accounting for sales with the right of return.

(Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of \(2,000,000. The fixed fee stipulated in the contract is \)450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of \(800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is \)1,200,000. Altom was billed $600,000 under the contract.

Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form.

Jansen Corporation shipped \(20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of \)2,000. Gooch Company paid \(500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for \)21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen’s journal entry when the cash is received.
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