CPAnet Forum: Note Receivable/Franchise Revenue

Active Topics

Memberlist

Help

FAR STUDY GROUP
CPAnet Forum : FAR STUDY GROUP

Topic: Note Receivable/Franchise Revenue (

Topic Closed)

Author

Message

<< Prev Topic | Next Topic >>

bobthecpa
Regular
Regular

Joined: 27 Mar 2010
Online Status: Offline
Posts: 152

Posted: 13 Apr 2010 at 04:25 \| IP Logged

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker's restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year.

Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker.
What amount should Baker report as franchise revenue during the current year?

   A. $0
   B. $25,000
   C. $59,000
   D. $65,000

I'm brain farting as to why the answer is C and not D. My first instinct is to always record Notes Receivable @ Face

N/R         &nb sp; 34,000   -----> why not 40,000?
Cash         25,000
        Franchise Revenue 59,000

Is it supposed to be??

N/R         &nb sp;    34,000
Cash             25,000
        UE-Interest Revenue     6,000
        Franchise Revenue      59,000

bobthecpa
Regular
Regular

Joined: 27 Mar 2010
Online Status: Offline
Posts: 152

Posted: 13 Apr 2010 at 05:03 \| IP Logged

Oh dear. Apparently, ALL this time I have never really understood what the heck to do with Notes Receivables.

I'm in a state of shock right now because I always just guessed or answered applying the concept incorrectly and got lucky more often than not.

Answer is the first J/E with Interest Revenue recorded as it is accrued each year. Right?

venchlu
Major Contributor

Joined: 18 Aug 2009
Location: United States
Online Status: Offline
Posts: 587

Posted: 13 Apr 2010 at 10:01 \| IP Logged

Well, i guess ur JE is fine...

I will do my JE as the following:

Dr -Cash 25,000

Dr-N/R 40,000

Cr-Discount 6,000

Cr-Franchise Revenue 59,000

What do we do with Discount 6000, we will amortize afterwards using the discount rate they used to calculate the PV 34, 000 of 40,000.

The key to this question is that "The initial cash payment is nonrefundable and no future services are required by Baker".
That is why we recognize 59,000 (cash rec'd 25, 000 + PV of $34,000) right away.

__________________
REG 91
BEC 89
AUD 88
MA certified
FAR 94

Sorry, you can NOT post a reply.
This topic is closed.

Printable version

You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum