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Problem - ABC Inc., franchisor, entered into a franchise agreement with DEF Inc., franchisee, on July 1, 2020. The total franchise fee agreed upon is 550,000 of which 50,000 is payable upon signing and the balance is to be covered by a note payable in four equal annual installments. The direct franchise cost incurred was 325,000. Indirect franchise expenses of 31,250 was also paid. The relevant interest rate is 12% and the note is reasonably assured of collection. The franchise outlet commenced its operations on July 25, 2020.
1. Assuming the note payable is interest-bearing, how much is the net income to be reported in the July 2020 income statement.
A. 198,750
B. 77,550
C. 193,750
D. 73,750
2. Assuming the note payable is non-interest bearing (use two decimal places for the present value factor), how much net income is to be reported in the July 2020 income statement?
B. 193,750
C. 77,750
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