[hopeful_cpa]

FAR Question:

On 12/31/09, Moon Inc authorized Luna Co to operate as a franchisee for an initial franchise fee of $100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in three annual installments of $20,000 each, beginning 12/31/10. On 12/31/09, the present value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in 2010. In its 12/31/09 balance sheet, what amount should Moon report as unearned franchise fees?

Answer choices:

$88,000

$0

$100,000

$48,000

The answer is $88,000.

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[jenuno01]

You record the Liability (Unearned Franchise Rev) at Present Value + whatever pre-payment you've received currently that you haven't earned:

48,000 + 40,000= 88,000

Class of 2012

[hopeful_cpa]

Is that even when the services aren't fully performed until the following year?

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[hopeful_cpa]

Bump… Is that allowed?

Still looking for some help on my reply.

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[hopeful_cpa]

Bump… Is that allowed?

Still looking for some help on my reply.

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Anonymous]

Quoting… Is that even when the services aren't fully performed until the following year?

Yes, because the question specifically stated that the services wouldn't be performed until the following year. It doesn't matter when the franchise is purchased, it just matters when the franchisor performs the required services that pertain to the initial fee.

[Working-Hard]

I think you might get mixed up with REG taxable income concept.

Under GAAP, we should journalize that. It's an advanced payment that we consider as “liability” (unearned).

So we journalize what we received ($40,000) and the present value of the “realizable” income ($44,000).

🙂

[Anonymous]

Can some one give us the JE for this transaction?

[Anonymous]

Is the following JE correct for the above problem ?

Dr. Cash. 40,000

Dr. Note Receivable 60,000

Cr. Unearned Revenue. 88,000

Cr. Discount on N/R. 12,000

I would appreciate if anybody can confirm or correct.

[Working-Hard]

That's the right entry. I think it could alternatively be netted, too (i.e. DR. Discounted N/R 44,000).

And a correction, installment sale is not GAAP; so I guess we're talking about financial accounting treatment in general.

[Anonymous]

@Working-Hard, thnx for the confirmation.

Installment sales method normally violates GAAP. It is, however, permitted in circumstances when there is a substantial doubt to the collection of the receivable, based on the conservatism principal.

[mel91]

If this is the entry to record the initial franchise fee:

Dr. Cash. 40,000

Dr. Note Receivable 60,000

Cr. Unearned Revenue. 88,000

Cr. Discount on N/R. 12,000

What would be the entry once the fee is earned? How is the discount on N/R affected?

[Author]

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