Reference no: EM133028180

Questions -

Q1. On December 31, 2021, RM Company authorized GINNY to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement, and the balance, represented by a note, is due in three annual payments of $30,000 each, beginning December 31, 2022. The present value on December 31, 2021 of the 3 annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by RM, however, substantial future services are required of RM. Collectability of the note is reasonably certain. On December 31, 2021, how much should RM record as unearned franchise fees in respect of the GINNY franchise?

Q2. Sheeran Company charges an initial franchise fee of $500,000 for the right to operate to operate as a franchise of Sheeran. Of this amount, $100,000 is payable when the agreement was signed and the balance is payable in a noninterest bearing note in five annual payments of $80,000 each. In return for the initial franchise fee, the franchisor will help locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide the bookkeeping services. The credit rating of the franchisee indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of $80,000 each discounted at 8% is $319,416.80. The discount represents the interest revenue to be accrued by the franchisor over the payment period. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectability of the note is reasonably assured and substantial performance has occurred: how much are the earned and unearned franchise fees?