Summary Business Accounting

Question:

On October 1, 2013, the Submarine Sandwich Company entered into a franchise agreement with an

individual.

In exchange for an initial franchise fee of $300,000, Submarine will provide initial services to the

franchisee to include assistance in design and construction of the building, help in training employees,

and help in obtaining financing. 10% of the initial franchise fee is payable on October 1, 2013, with the

remaining $270,000 payable in nine equal annual installments beginning on October 1, 2014. These

installments will include interest at an appropriate rate. The franchise opened for business on January 15,

2014.

Required:

Assume that the initial services to be performed by Submarine Sandwich subsequent to October 1, 2013,

are substantial and that collectibility of the installment receivable is reasonably certain. Substantial

performance of the initial services is deemed to have occurred when the franchise opened. Prepare the

necessary journal entries for the following dates (ignoring interest charges):

1. October 1, 2013

2. January 15, 2014



Answer:




October 1, 2013

Cash (10% x $300,000) ..................................................................30,000

Note receivable...................................................................................... 270,000

Unearned franchise fee revenue........................................................ 300,000

To record franchise agreement and down payment