Question

(Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

Short answer

Franchise revenuethroughout the franchise period is $7,913.

Step-by-step solution

Initial Down Payment

A down payment is a one-time, non-refundable payment made in advance for the purchase of a high-priced item – such as a vehicle or a house – with the remainder of the payment made with the help of a bank or financial institution.

Journal entries for Campbell

Date	Particular	Debit ($)	Credit ($)
January 1, 2017	Cash a/c	10,000
	Note receivable a/c	40,000
	Discount on note receivable a/c		10,433
	Unearned franchise revenue a/c		39,567
December 31, 2017	Unearned franchise revenue a/c	7,913
	Franchise revenue a/c		7,913
December 31, 2017	Discount on notes receivable	3,252
	Interest revenue a/c		3,252

Working Notes:

$\begin{array}{rcl}\mathrm{Franchise}\mathrm{revenue}& =& \frac{\mathrm{Unearned}\mathrm{franchise}\mathrm{revenue}}{\mathrm{Franchise}\mathrm{period}}\\ & =& \frac{\$39,567}{5}\\ & =& \$7,913\end{array}$