On Apr 1 2008, OB Company entered into a 10 yearfranchise agreement with a group
ID: 2433380 • Letter: O
Question
On Apr 1 2008, OB Company entered into a 10 yearfranchise agreement with a group of individuals.The firm recevies a$300000 initial franchise fee & agrees to assist in the designof the building, help secure financing & provide managementadvice over the 1st half of the franchise agreement.A down payment of 20% of the franchise fee is due onApr 1 2008.
The remaining 80% is to be payable in 8 equalinstallments beginning on Apr 1 2009. Assume that services to beperformed by OB Company between Apr 1 2008 & Aug 15 2008, thedate the franchise opened, are substantial & that theinstallment receivable is reasonably collectible. Also assume thatsubstantial performance of the intial services has occured as ofAug 15 2008.
Prepare the necessary journal entries for OBCompany for April 1 & 15 2008. (ignore interest)
Explanation / Answer
In Miwa's Dec31 2008 Balance sheet, unearned franchise fee fromJeff's franchise should be reported as how below:- Assets Liabilities+Share Equity Notes Receivable- Franchise fee $90,000 UnearnedFranchise Fee $90,000 Every year, when Notes are paid by Jeff, Cash will goup by$30,000, Notes Rxable will reduce by $30,000, Unearned FranchiseFee will reduce by $30,000 and Shareholders's equity will goup by$30,000. Thus Revenue is recognized when the Miwa has substantiallyperformed all material services or conditions and Only when revenuefrom Jeff is received for the balance 3 years.
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