Question

(Franchise Entries) Pacific Crossburgers Inc. charges an initial franchise fee of $70,000.Uponthesigningoftheagreement(whichcovers3years),apaymentof$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.)

The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise.

Short answer

Both sides of the Journal total$73,929.

Step-by-step solution

Definition of Franchisor

The company that provides rights to another company for selling its product or service is a franchisor. Such rights are provided to the franchisee.

Journal entries under assumption that franchisor has substantial service to perform

Date	Accounts and Explanation	Debit $	Credit $
1 May 2017	Cash	$28,000
	Note receivable	$42,000
	Discount on note receivable (PVAF: 2.49) $\left(\$42,000-\left(\$14,000\times 2.49\right)\right)$		$7,140
	Unearned franchise revenue		$62,860
31 Dec 2017	Unearned franchise revenuedata-custom-editor="chemistry" $\left(\frac{\$62,680}{3}\times \frac{8}{12}\right)$	$13,929
	Franchise revenue		$13,929
		$73,929	$73,929