On July 1, year 1, James Rago signed an agreement to operate
as a franchisee of Fast Foods, Inc. for an initial franchise fee of
$60,000. Of this am... Accounting MCQs | Accounting MCQs

On July 1, year 1, James Rago signed an agreement to operate
as a franchisee of Fast Foods, Inc. for an initial franchise fee of
$60,000. Of this amount, $20,000 was paid when the agreement
was signed and the balance is payable in four equal annual payments
of $10,000 beginning July 1, year 2. The agreement provides
that the down payment is not refundable and no future
services are required of the franchisor. Rago’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:
Present value of $1 at 14% for four periods 0.59
Future amount of $1 at 14% for four periods 1.69
Present value of an ordinary annuity of $1 at 14% for four periods 2.91
Rago should record the acquisition cost of the franchise on July 1,
year 1 at

$43,600
$49,100
$60,000
$67,600Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(b) The requirement is to determine the acquisition
cost of a franchise. The cost of this franchise is the down payment
of $20,000 plus the present value of the four equal annual
payments of $10,000. The annual payments represent an annuity,
so the $10,000 annual payment is multiplied by the present
value factor of 2.91. Therefore, the franchise cost is $49,100
($20,000 + $29,100). The journal entry is
Franchise 49,100
Discount on notes payable 10,900
Notes payable 40,000
Cash 20,000