Reference no: EM132954815
PROBLEM 1 - On January 1, 2020, Rose Company entered into a franchise agreement with Tulip Corporation to sell Tulip Products. The agreement provides for an initial franchise fee of 5,000,000 payable as follows: 3,000,000 cash to be paid upon the signing of the contract and the balance in four equal annual payments of 500,000 to start December 31, 2020. Rose signs 10% interest-bearing notes for the balance.
The agreement further provides that the franchisor will assist the franchisee in locating the business site, designing and supervising the construction of the building, and training of the management and employees. The agreement also provides that franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales on July 31, 2020. The franchisor completed the initial services required in the contract at a cost of 1,200,000. The franchise commenced business operations on November 2, 2020. The gross sales reported to the franchisor for the months of November and December is 450,000 and 600,000 respectively.
Requirements - Prepare the journal entries in the books of the franchisor for 2020; Compute for the net income in 2020
a. Assuming that the collection of the notes is reasonably assured
b. Assuming that the collection of the notes is not reasonably assured
PROBLEM 2 - On January 2, 2020, Ms. Ching signed an agreement to operate as a franchisee of Chow, Inc. for an initial franchise fee of 5,600,000. Of this amount 2,100,000 was paid when the agreement was signed and the balance is payable in five annual payments of 700,000 beginning December 31, 2020. Ms. Ching signed a non-interest bearing note for the balance. Ms. Ching's credit rating indicates that she can borrow money at 20% interest for loan of this type. The present value of an annuity of 1 at 20% for 5 periods is 2.99. The contract includes a continuing franchise fee of 5% of the franchisee's gross sales, to be collected monthly.
On November 25, 2020, the franchisor substantially performed the initial services provided in the contract at a cost of 629,014. Indirect cost is 30,000. The franchisee's outlet commenced operations on December 1, 2020. The gross sales of Ms. Ching for the month of December 2020 is 280,000.
Required - Prepare the journal entries in the books of the franchisor for 2020; Compute for the net income in 2020
a. Assuming that the collection of the notes is reasonably assured
b. Assuming that the collection of the notes is not reasonably assured