Question

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

Both sides of the Journal total$132,860.

Step-by-step solution

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.

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) $\left(\$42,000-\left(\$14,000\times 2.49\right)\right)$		$7,140
	Unearned franchise revenue		$62,860
1 July 2017	Unearned franchise revenue	$62,860
	Franchise revenue		$62,860
		$132,860	$132,860