On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to op
ID: 2554581 • Letter: O
Question
On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Ayayai Inc. for an initial franchise fee of $55,000. The amount of $8,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $9,400 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.
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2017
SHOW LIST OF ACCOUNTS
LINK TO TEXT
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2017
Apr. 1, 2017
Dec. 31, 2017
(To record service revenue)
(To record interest revenue)
SHOW LIST OF ACCOUNTS
LINK TO TEXT
Date
Account Titles and Explanation
Debit
Credit
Jan. 1, 2017
Dec. 31, 2017
(To record service revenue)
(To record interest revenue)
On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Ayayai Inc. for an initial franchise fee of $55,000. The amount of $8,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $9,400 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.
Explanation / Answer
WHAT IS FRANCHISING it is where a leading , known business entered into agreement in which for fee ONE PARTY ( FRANCHISOR) gives the other party ( FRANCHISEE) the rights to perform certain functions or sell certain products or services of the franchisor.
A SUBSTANTIAL PERFORMANCE OF THE FRANCHISOR IS THE KEY TO RECOGNITION OF THE INITIAL FRANCHISE FEE. SUBSTANTIAL PERFORMANCE OF THE FRANSHISOR DENOTES CONSUMMATION OFTHE TRANSACTIONS WHEN:
1. THERE IS NO REMAINING OBLIGATION BY AGREEMENT , TRADE OR PRACTICE TO REFUND THE INITIAL FEE. OR TO EXCUSE NON PAYMENT OF UNPAID NOTES
2. SUBSTANTIALLY ALL THE INITIAL SERVICES OF THE FRANCHISOR HAVE BEEN PERFORMED
3. ALL OTHER CONDITIONS WHICH AFFECT CONSUMMATION HAVE BEEN MET.
Entries
When franchise fees is paid:
Fanchise fees account debit $8000
To Cash account credit $8000
Balance in franchise account=$55000-$8000=$47000/5=9400
Amortisation of fees every 5 years.
Franchise fees Ammortization Account debit 9400
To Franchise Account credit 9400
Cash Account debit 3000
To service revenue account credit 3000
If loan is avalied then interest would be considred as an expense.
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