Question

(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.)

The total franchise fee includes training services (with a value of \)2,400) for the period leading up to the franchise opening and two months following introduction.

Short answer

Both sides of the Journal total$132,860.

Step-by-step solution

Definition of Unearned Revenue

Unearned revenue can be defined as the benefits received from the customer, but the service for the benefits is not yet provided.

Journal entries under assumption that franchise fee includes training services

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 service revenue		$2,400
	Unearned franchise revenue (Balancing figure)		$60,460
1 July 2017	Unearned service revenue	$1,200
	Unearned franchise revenue	$60,460
	Service revenue$\left(\frac{\$2,400}{2}\right)$		$1,200
	Franchise revenue		$60,460
1 Sep 2017	Unearned service revenue	$1,200
	Service revenue		$1,200
		$132,860	$132,860