Question

Douglas Diners Inc. charges an initial franchise fee of $90,000 broken down as follows:

Answer 1

Answer:

b. a credit to Service Revenue for $11,500.

c. a credit to Sales Revenue for $38,500.

Explanation:

The customer pays 40,000 then we solve for the present value of the future payments

30,000 / 1.08 + 30,000/1.08^2 = $ 53,497.94

Is is the amount net of interest that the company is charging the franchisee

The entry would be as follows

Cash   40,000 debit

account receivables 53,497.94 debit

 Sales Revenue               38,500 credit

 Service Revenue             11,500 credit

 Franchise Fee*           53,497.94 credit

As the fanchisee will not recieve further support from the franchisor It is already earned If the franchisee will receive support over the two year period then This would be unearned as the Franchisor has to provide assistance over the years to earned.