Exercise

Exercise 18-27 should be found on page 1095 of your textbook.  Some of you may find that your version of the textbook does not match mine (See the Announcement posted on Saturday, November 21).  Here is the complete Exercise.  Be sure that you have answered this version of the problem.

(Franchise Entries)  Pacific Crossburgers Inc. charges an initial franchise fee of $70,000.  Upon the signing of the agreement, a down 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.

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INSTRUCTIONS:

Prepare the entries to  record the initial franchise fee on the books of the franchisor (Pacific Crossburgers) under the following assumptions.  (Round to the nearest dollar)

a.  The $28,000 down payment is not refundable, no future services are required by the franchisor, and collection of the note is reasonably assured.

b.  The franchisor has substantial services to perform, the down payment is refundable, and the collection of the note is very uncertain.

c.  The down payment is not refundable, collection of the note is reasonably certain, the franchisor has yet to perform a substantial amount of services, and the down payment represents a fair measure of the services already performed.

This problem relates to franchises which are discussed in Appendix 18A beginning on page 1081.  The exercise has three parts each requiring a journal entry.  Each part is a separate assumption.  You will need the factor for the Present Value of an ordinary annuity (3 years @ 10%) for parts (a) and (c).  The factor is 2.48685.

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