Question

Frozen Delight, Inc. charges an initial franchise fee of $79,300 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,600 is collected immediately. The remainder is collected in four equal annual installments of $13,425 each. These installments have a present value of $41,960. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,200) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2014, training is completed, and the store opens on July 1, 2014.

Prepare the journal entries required by Frozen Delight in 2014.

Answer 1

April 1, 2014 ...

Debit:

Cash = 25,600

Notes Receivable = 53,700

Credit:

Discount on Notes Receivable = 11,740

Unearned Franchise Revenue = 65,360

Unearned Service Revenue = 2,200

July 1, 2014 ...

Debt:

Unearned Franchise Revenue = 65,360

Unearned Service Revenue = 2,200

Credit:

Franchise Revenue = 65,360

Service Revenue = 2,200

Step-by-step explanation:

Customer made cash payment of 25,600

Remaining amount owed is offered in a 0% note over 4 years

Discount on the NR is calculated by subtracting its present value from the principal owed (13,425 * 4) = 53,700 - 41,960 = 11,740

The remaining revenue is split between the franchise and service (training). 79,300 - 11,740 = 67,560 - 2,200 = 65,360

The unearned franchise revenue = 65,360 and the unearned training revenue is 2,200

The final step is moving the values from the unearned accounts to the revenue accounts on 7/1 when the store opens. At this point, the franchise agreement is fulfilled and the franchisor is entitled to record the revenues.

Answer 2

Check attached file

Step-by-step explanation: