On November 15, 2016 the Coldstone Ice Cream Company entered into a franchise ag
ID: 2454985 • Letter: O
Question
On November 15, 2016 the Coldstone Ice Cream Company entered into a franchise agreement with an individual. In exchange for an initial franchise fee of $25,000. Coldstone will provide initial services to the franchise to include assistance in design and construction of the building, help in training employees, help in obtaining financing, and management advice over the first five years of the ten year franchise agreement.
50% of the initial franchise fee is payable on November 12,2016 with the remaining $12,500 payable in five equal annual installments beginning on November 15, 2007. Theses installments will include interest at an appropriate rate. The franchise opened for business on February 15, 2007.
Requirement:
Assume that the initial services to be performed by Coldstone subsequent to November 15, 2016 are substantial and that collectability of the installment receivable is reasonably certain. Substantial performance of the initial services is deemed to have occurred when the franchise opened. Prepare the necessary journal entries for the following dates (ignoring interest charge)
November 15, 2016
February 15, 2017
Explanation / Answer
Solution:
(A). November -15 - 2016:
Franchise Expences 25,000
Initial Franchise 25,000
(B). February- 15-2017:
Down Payment 25,000
5 Years Payment 12,500 * 5 62,500
Total Cash Receipts = 87,500
(C). 50% Initial Franchise Fee Payable on Nov-2016:
25,000 * 50 / 100 = 12,500
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