Exercise 18-38 Carla Inc. charges an initial franchise fee of $71,000. Upon the
ID: 2343148 • Letter: E
Question
Exercise 18-38 Carla Inc. charges an initial franchise fee of $71,000. Upon the signing of the agreement (which covers 3 years), a payment of $28,400 is due. Thereafter, 3 annual payments of $14,200 are required. The credit rating of the franchisee is such that it would have to pay interest at 8% to borrow money. The franchise agreement is signed on May 1, 2017, and the franchise commences operation on July 1, 2017. Prepare the journal entries in 2017 for the franchisor under the following assumptions. (a) No future services are required by the franchisor once the franchise starts operations (b) The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise (c) The total franchise fee includes training services (with a value of $2,800) for the period leading up to the franchise opening and for 2 months following opening (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter O for the amounts. Round present value factor calculations to 5 decimal places, e.g.1.25124 and the final answer to o decimal places e.g. 58,971.) No. Date Account Titles and Explanation Debit Credit (a) May 1, 2017 (b) May 1, 2017Explanation / Answer
Cullamber inc.
Date
Account title
Debit
Credit
Assumption 1
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue
36595
Revenue earned
28400
(To record franchise agreement)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (May to Dec =8 months) (36595*8%*8/12)
Assumption 2
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue
36595
Revenue earned
28400
(to record franchise agreement)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (May to Dec =8 months) (36595*8%*8/12)
Assumption 3
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue (36595+2800)
39395
Revenue earned (28400-2800)
25600
(to record franchise agreement)
Jul 1,2017
Unearned revenue
2800
Training service revenue
2800
(To record service revenue.)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (may to Dec =8 months) (36595*8%*8/12)
Year
Cash receipt
Discount factor @8%
Year 1
14200
0.925926
13148.15
Year 2
14200
0.857339
12174.21
Year 3
14200
0.793832
11272.42
Present value for Notes receivable
36595
Cullamber inc.
Date
Account title
Debit
Credit
Assumption 1
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue
36595
Revenue earned
28400
(To record franchise agreement)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (May to Dec =8 months) (36595*8%*8/12)
Assumption 2
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue
36595
Revenue earned
28400
(to record franchise agreement)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (May to Dec =8 months) (36595*8%*8/12)
Assumption 3
May 1 ,2017
Cash
28400
Notes receivable
36595
Unearned revenue (36595+2800)
39395
Revenue earned (28400-2800)
25600
(to record franchise agreement)
Jul 1,2017
Unearned revenue
2800
Training service revenue
2800
(To record service revenue.)
Dec 31 ,2017
Interest receivable
1952
Interest revenue
1952
(To record interest revenue on notes receivable.) (may to Dec =8 months) (36595*8%*8/12)
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