Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,014,000. The franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.
InstructionsPrepare the entry to record the initial franchise fee. Show supporting computations in good form.

Question

Quizplus · Accepted Answer

The Answer of Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,014,000. The franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.
InstructionsPrepare the entry to record the initial franchise fee. Show supporting computations in good form.

Pasta Inn Charges an Initial Fee of $1,600,000 for a Franchise