[vodrldnr]

Each of Potter Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of $30,000. By December 31, Year 1, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, Year 2, and December 31, Year 3. Experience indicates that one franchisee will default on the additional payments. Services for the initial fee will be performed in Year 2. What amount of net unearned franchise fees would Potter report at December 31, Year 1?

A. $400,000

B. $630,000

C. $600,000

D. $610,000

answer: c

{By December 31, Year 1, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31} <= wording is so confusing to me.

does this sentence mean that total of 21 franchisees paid total amount of a nonrefundable $10,000 and note of $10,000? or each of 21 franchisees pay 10,000 + 10,000, resulting 23* (10,000+10,000)

help me T-T

[Biff-1955-Tannen]

21 franchisees paid an initial $10,000 and signed a note to pay 2 annual payments of $10,000.
So the company has collected $210,000 cash so far, and expects to collect an additional $20,000 over two years from the note from only 20 franchisees.

Are you sure the answer is c and not D?

EDIT: I just found the problem on ninja, the answer is D

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[vodrldnr]

I am sorry. you are right. the answer is D.

but I cannot get 610,000

why subtract 20,000 from 63,000

;_;

[Missy]

Since their experience indicates that one franchisee will default on the additional 20k in payments they will reduce the unearned franchise fees by that amount. Its kind of like a built in bad debt reserve.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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