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Subject Topic: Franchise Accounting (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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Payal123
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Posted: 24 Jun 2009 at 12:28 | IP Logged  

I was going through the example on Franchise Accounting given in Beckers TB pg - F2-14 & i have a little doubt about Interest Expense for Year 2.
Book does explain very well for year 1 accounting. But when i tried solving for year 2 i am not able to calculate the interest expense.

According to my understanding after 5 years, balance in "Discount on notes payable" should be zero since the entire amount will be recognized as interest expense by the end of 5 yrs. But what will be the amount of interest expense in those years?

Can anyone please explain.



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Payal123
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Posted: 24 Jun 2009 at 23:22 | IP Logged  

Can any1 please help me on this ????????

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winsouza
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Posted: 25 Jun 2009 at 00:48 | IP Logged  

Payal123, here i would take 10 years has Peter expects the franchise to last for 10 years so would try to spread the discount over the 10 years the time he anticipates to derive the benefit.

1st year Discount: $37,908 X 10% X 1/2 year = $1,895                  Years 2 to 9:        $37,908 X 10%         &nb sp;      = $3,790.80        &nb sp;     Year 10 discount would be the balance of $1,895.80

But we had done the present value as per 5 years. I don't have an answer why we did the present value for 5 years but we amortize the benefit over 10 years, but will come back with one :)



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Payal123
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Posted: 25 Jun 2009 at 00:55 | IP Logged  

hey winsouza,

amortization will be done over the 10 years since that is the period of franchise benefit.

But since Notes Payable is only for 5yrs, interest will be calculated for 5yrs only. But what will be the interest expense from yr 2 to  yr5?

Thanx once again for your reply.



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zade
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Posted: 25 Jun 2009 at 17:49 | IP Logged  

I took a look at it...and I really dont know!! I hope someone else can help out...

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