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Chapter 18: Question BE18-25 (page 1034)

Frozen Delight, Inc. charges an initial franchise fee of \(75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, \)25,000 is collected immediately. The remainder is collected in four equal annual installments of \(12,500 each. These installments have a present value of \)41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.

Short Answer

Expert verified

Total Revenue = 66,402

Step by step solution

01

Meaning of Franchise Agreement

A franchisoroffers a franchisee the right to conduct a company or market or distribute products or services that are identical or linked with the franchisor's trademark. In exchange, a franchisee pays the franchisor one-time or ongoing payments in accordance with thefranchise agreement's amount, terms, and conditions.

02

Journal entries in 2017 by Frozen Delight

Date

Particular

Debit ($)

Credit ($)

April 1, 2017

Cash a/c

25,000

Notes receivable a/c

50,000

To Discount on note receivable a/c

8,598

To Unearned service revenue a/c

2,000

To Unearned franchise revenue a/c

64,402

July 1, 2017

Unearned service revenue a/c

2,000

Unearned franchise revenue a/c

64,402

To Franchise revenue a/c

64,402

To Sales revenue a/c

2,000

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