On July 1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $180,000.Of this amount, $60,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $30,000 beginning July 1, 2013.The agreement provides that the down payment is not refundable and no future services are required of the franchisor.Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type.Information on present and future value factors is as follows: Wynne should record the acquisition cost of the franchise on July 1, 2012 at

Question

On July 1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $180,000.Of this amount, $60,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $30,000 beginning July 1, 2013.The agreement provides that the down payment is not refundable and no future services are required of the franchisor.Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type.Information on present and future value factors is as follows:  Wynne should record the acquisition cost of the franchise on July 1, 2012 at

Quizplus · Accepted Answer

The initial franchise fee of $180,000 should be recorded at present value, as Wynne is making installment payments and the agreement provides no future services from the franchisor. The present value of the four future payments of $30,000 each, discounted at 14% for 4 periods, is $96,300. Thus, the present value of the initial franchise fee is $60,000 + $96,300 = $156,300. Therefore, Wynne should record the acquisition cost of the franchise on July 1, 2012, at $156,300, which is closest to option B ($147,300).

On July 1, 2012, Ed Wynne Signed an Agreement to Operate