On January 1, year 1, Suzette Company signed a franchise agreement for a period of 20 years for an initial fee of 6,000,000. On the same date, the entity paid 2,000,000 which is not refundable and agreed to pay the balance in four equal annual payments of 1,000,000 at each year end. No future services are required are required of the franchisor. The entity can borrow at 14% for a loan of this type. Present value of 1 at 14% for 4 periods 0.59 Future amount of 1 at 14% for 4 periods 1.69 Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91 The agreement further provides that the franchisee shall pay a periodic fee of 5% based on the annual gross sales. During the current year, Suzette Company realized gross sales of 25,000,000 Prepare the journal entries for two years in connection with the franchise on the books of the franchisee. Required: Determine the initial measurement of the franchise and prepare the entries for the company for the first two years.
On January 1, year 1, Suzette Company signed a franchise agreement for a period of
20 years for an initial fee of 6,000,000.
On the same date, the entity paid 2,000,000 which is not refundable and agreed to
pay the balance in four equal annual payments of 1,000,000 at each year end.
No future services are required are required of the franchisor. The entity can borrow
at 14% for a loan of this type.
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91
The agreement further provides that the franchisee shall pay a periodic fee of 5% based on
the annual gross sales. During the current year, Suzette Company realized gross sales of
25,000,000
Prepare the
franchisee.
Required: Determine the initial measurement of the franchise and prepare the entries for the
company for the first two years.
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