Reference no: EM132690149

Ayayai Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions.

1. The franchisee is charged an initial fee of $150,000. Of this amount, $25,000 is payable when the agreement is signed, and a $125,000 zero-interest-bearing note is payable with a $25,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of $25,000, each discounted at 9%, is $97,241.
2. All of the initial franchise fee collected by Ayayai is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise.
3. In return for the initial franchise fee, Ayayai agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Ayayai helps maintain the brand value of the franchise.
4. In addition to the initial franchise fee, the franchisee is required to pay to Ayayai a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Ayayai at or below prevailing market prices.

• Management of Ayayai Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $25,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 9%.

Problem 1: Prepare the journal entries for the initial and continuing franchise fees, assuming: (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

(1) Franchise agreement is signed on January 5, 2017.

(2) Ayayai completes franchise startup tasks and the franchise opens on July 1, 2017.

(3) The franchisee records $325,000 in sales in the first 6 months of operations and remits the monthly franchise fee on December 31, 2017.