Question

Monitor received $91,000 on July 1, 2018, from Perkins and accepted a note receivable for the rest of the franchise price. Monitor will construct and equip Perkins' building and train and certify Perkins by September 1, and Perkins' five-year right to operate as a Monitor Muffler establishment will commence on September 1 as well.

What journal entry would Monitor record on July 1, 2018, to reflect the sale of a franchise to Dan Perkins?

Answer 1

Monitor would record a debit to cash and notes receivable, and a credit to franchise revenue or unearned franchise revenue on July 1, 2018, for the sale of a franchise to Perkins. The exact journal entry depends on the total franchise price and whether the franchise services are completed.

Step-by-step explanation:

On July 1, 2018, when Monitor receives $91,000 and a note receivable for the balance of the franchise price from Perkins, the journal entry to reflect this transaction would include a debit to cash for the amount received in cash, a debit to notes receivable for the balance amount, and a credit to franchise revenue or unearned franchise revenue (if the franchise service obligations are not completed by that date). The exact credit account will depend on whether Monitor recognizes the revenue immediately or defers it until the franchise services are completed by September 1, 2018.

Example Journal Entry:

Cash .......................... $91,000

• Notes Receivable ............... $X
• Franchise Revenue (or Unearned Franchise Revenue if revenue recognition is deferred) ........ $Total Franchise Price

It is important to note that in actual practice, the total franchise price would be the sum of the cash received and the note receivable amount. Additionally, if the services are not yet completed, revenue recognition criteria might dictate deferring the revenue until the specified date when Perkins' right to operate commences. These details ensure proper revenue accounting in compliance with accounting standards.