INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
9th Edition
ISBN: 9781260216141
Author: SPICELAND
Publisher: MCG CUSTOM
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Textbook Question
Chapter 5, Problem 5.19P
Franchise sales; installment sales method
Olive Branch Restaurant Corporation sells franchises throughout the western states. On January 30, 2018, the company entered into the following franchise agreement with Jim and Tammy Masters:
- 1. The initial franchise fee is $1.2 million. $200,000 is payable immediately and the remainder is due in ten, $100,000 installments plus 10% interest on the unpaid balance each January 30, beginning January 30, 2019. The 10% interest rate is an appropriate market rate.
- 2. In addition to allowing the franchisee to use the franchise name for the 10-year term of the agreement, in exchange for the initial fee Olive Branch agrees to assist the franchisee in selecting a location, obtaining financing, designing and constructing the restaurant building, and training employees.
- 3. All of the initial down payment of $200,000 is to be refunded by Olive Branch and the remaining obligation canceled if, for any reason, the franchisee fails to open the franchise.
- 4. In addition to the initial franchise fee, the franchisee is required to pay a monthly fee of 3% of franchise sales for advertising, promotion, menu planning, and other continuing services to be provided by Olive Branch over the life of the agreement. This fee is payable on the 10th of the following month. Substantial performance of the initial services provided by Olive Branch, which are significant, is deemed to have occurred when the franchise opened on September 1, 2018. Franchise sales for the month of September 2018 were $40,000.
Required:
- 1. Assuming that collectibility of the installment receivable is reasonably certain, prepare the necessary journal entries for Olive Branch on the following dates (ignore interest charges on the installment receivable and the costs of providing franchise services):
- a. January 30, 2018
- b. September 1, 2018
- c. September 30, 2018
- d. January 30, 2019
- 2. Assume that significant uncertainty exists as to the collection of the installment receivable and that Olive Branch elects to recognize initial franchise fee revenue using the installment sales method. Prepare the necessary journal entries for the dates listed in requirement 1 (ignore interest charges on the installment receivable and the costs of providing franchise services).
- 3. Examine your answer to requirement 1a of this problem (the January 30, 2018,
journal entry under the installment sales method). What is the effect of that journal entry on Olive Branch’sbalance sheet ? (Ignore cash.) Briefly explain your answer.
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Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement (which covers 3 years), a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement is signed on May 1, 2020, and the franchise commences operation on July 1, 2020.
Instructions
Prepare the journal entries in 2020 for the franchisor under the following assumptions. (Round to the nearest dollar.)
a. No future services are required by the franchisor once the franchise starts operations.
b. The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise.
c. The total franchise fee includes training services (with a value of $2,400) for the period leading up to the franchise opening and for 2 months following opening.
Pina Universe charges an initial franchise fee of $ 234,000. Upon the signing of the agreement, a payment of $ 26,000 is due. Thereafter, 5 annual payments of $ 41,600 are required. The credit rating of the franchisee is such that it would have to pay interest at 9% to borrow money. The franchise agreement is signed on August 1, 2020, and the franchise commences operation on October 1, 2020.
Prepare the journal entries in 2020 for the franchisor under the following assumptions.
a. No future services are required by the franchisee once the franchise starts operations.
b. The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise.
c. The total franchise fee includes training services (with a value of $ 6,900) for the period leading up to the franchise opening and for 2 months following opening
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Chapter 5 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
Ch. 5 - What are the five key steps a company follows to...Ch. 5 - What indicators suggest that a performance...Ch. 5 - What criteria determine whether a company can...Ch. 5 - We recognize service revenue either at one point...Ch. 5 - What characteristics make a good or service a...Ch. 5 - Prob. 5.6QCh. 5 - What must a contract include for the contract to...Ch. 5 - How might the definition of probable affect...Ch. 5 - When a contract includes an option to buy...Ch. 5 - Prob. 5.10Q
Ch. 5 - Prob. 5.11QCh. 5 - Is a customers right to return merchandise a...Ch. 5 - Prob. 5.13QCh. 5 - Under what circumstances should sellers consider...Ch. 5 - When should a seller view a payment to its...Ch. 5 - What are three methods for estimating stand-alone...Ch. 5 - When is revenue recognized with respect to...Ch. 5 - In a franchise arrangement, what are a franchisors...Ch. 5 - When does a company typically recognize revenue...Ch. 5 - Prob. 5.20QCh. 5 - Prob. 5.21QCh. 5 - Prob. 5.22QCh. 5 - Must bad debt expense be reported on its own line...Ch. 5 - Explain the difference between contract assets,...Ch. 5 - Explain how to account for revenue on a long-term...Ch. 5 - Prob. 5.26QCh. 5 - Prob. 5.27QCh. 5 - What are the two general criteria that must be...Ch. 5 - Explain why, in most cases, a seller recognizes...Ch. 5 - Revenue recognition for most installment sales...Ch. 5 - Prob. 5.31QCh. 5 - How does a company report deferred gross profit...Ch. 5 - Prob. 5.33QCh. 5 - Briefly describe the guidelines for recognizing...Ch. 5 - Prob. 5.35QCh. 5 - Briefly describe the guidelines provided by GAAP...Ch. 5 - Revenue recognition at a point in time LO52 On...Ch. 5 - Timing of revenue recognition LO53 Estate...Ch. 5 - Prob. 5.3BECh. 5 - Allocating the transaction price LO54 Sarjit...Ch. 5 - Existence of a contract LO5-5 Tulane Tires wrote...Ch. 5 - Prob. 5.6BECh. 5 - Prob. 5.7BECh. 5 - Performance obligations; warranties LO55 Vroom...Ch. 5 - Prob. 5.9BECh. 5 - Prob. 5.10BECh. 5 - Performance obligations; construction LO55...Ch. 5 - Prob. 5.12BECh. 5 - Prob. 5.13BECh. 5 - Variable consideration LO56 Leo Consulting enters...Ch. 5 - Variable consideration LO56 In January 2018,...Ch. 5 - Prob. 5.16BECh. 5 - Prob. 5.17BECh. 5 - Payment s by the seller to the customer LO56...Ch. 5 - Estimating stand-alone selling prices: adjusted...Ch. 5 - Estimating stand-alone selling prices: expected...Ch. 5 - Estimating stand-alone selling prices; residual...Ch. 5 - Timing of revenue recognition; licenses LO57 Saar...Ch. 5 - Prob. 5.23BECh. 5 - Prob. 5.24BECh. 5 - Timing of revenue recognition; franchises LO57...Ch. 5 - Timing of revenue recognition; bill-and-hold LO57...Ch. 5 - Prob. 5.27BECh. 5 - Prob. 5.28BECh. 5 - Contract assets and contract liabilities LO58...Ch. 5 - Prob. 5.30BECh. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Prob. 5.32BECh. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognition; loss on...Ch. 5 - Installment sales method On July 1, 2018, Apache...Ch. 5 - Prob. 5.36BECh. 5 - Cost recovery method Refer to the situation...Ch. 5 - Prob. 5.38BECh. 5 - Prob. 5.39BECh. 5 - Revenue recognition; software contracts under IFRS...Ch. 5 - Prob. 5.41BECh. 5 - Prob. 5.1ECh. 5 - Prob. 5.2ECh. 5 - Allocating transaction price LO54 Video Planet...Ch. 5 - Prob. 5.4ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.8ECh. 5 - Prob. 5.9ECh. 5 - Variable considerationmost likely amount; change...Ch. 5 - Variable considerationexpected value; change in...Ch. 5 - Prob. 5.12ECh. 5 - Approaches for estimating stand-alone selling...Ch. 5 - FASB codification research LO56, LO57 Access the...Ch. 5 - Franchises; residual method LO56, LO57 Monitor...Ch. 5 - FASB codification research LO58 Access the FASB...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Income (loss) recognition; Long-term contract;...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Installment sales method Charter Corporation,...Ch. 5 - Installment sales method; journal entries [This is...Ch. 5 - Installment sales; alternative recognition methods...Ch. 5 - Journal entries; point of delivery, installment...Ch. 5 - Prob. 5.27ECh. 5 - Prob. 5.28ECh. 5 - Prob. 5.29ECh. 5 - Prob. 5.30ECh. 5 - Prob. 5.31ECh. 5 - Prob. 5.32ECh. 5 - Prob. 5.33ECh. 5 - Prob. 5.34ECh. 5 - Prob. 5.35ECh. 5 - Prob. 5.1PCh. 5 - Prob. 5.2PCh. 5 - Prob. 5.3PCh. 5 - Prob. 5.4PCh. 5 - Prob. 5.5PCh. 5 - Variable consideration; change of estimate LO53,...Ch. 5 - Prob. 5.7PCh. 5 - Prob. 5.8PCh. 5 - Prob. 5.9PCh. 5 - Long-term contract; revenue recognition over time ...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognized over time;...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Income statement presentation; installment sales...Ch. 5 - Prob. 5.15PCh. 5 - Installment sales; alternative recognition methods...Ch. 5 - Installment sales and cost recovery methods...Ch. 5 - Prob. 5.18PCh. 5 - Franchise sales; installment sales method Olive...Ch. 5 - Prob. 5.1BYPCh. 5 - Judgment Case 52 Satisfaction of performance...Ch. 5 - Judgment Case 53 Satisfaction of performance...Ch. 5 - Prob. 5.4BYPCh. 5 - Prob. 5.5BYPCh. 5 - Prob. 5.6BYPCh. 5 - Prob. 5.8BYPCh. 5 - Prob. 5.9BYPCh. 5 - Prob. 5.10BYPCh. 5 - Prob. 5.11BYPCh. 5 - Prob. 5.12BYPCh. 5 - Prob. 5.13BYPCh. 5 - Prob. 5.14BYPCh. 5 - Prob. 5.15BYPCh. 5 - Prob. 5.16BYPCh. 5 - Prob. 5.19BYPCh. 5 - Prob. 1CCTC
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