Reference no: EM132964373
Problem - 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 the 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
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