Pasta Inn charges an initial fee of $1,620,000 for a franchise, with $324,000 pa
ID: 2484807 • Letter: P
Question
Pasta Inn charges an initial fee of $1,620,000 for a franchise, with $324,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,036,800. The franchisee has the right to purchase $30,000 of kitchen equipment and supplies for $51,800. 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 $500 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.
Explanation / Answer
Particulars:::::::::::::::::::::::::::::::::::::::::::::::::::::::::Amount
Initial fee:::::::::::::::::::::::::::::::::::::::::::::::::::::::$1,620,000
Balance payment= $1,296,000
Less
Present value::::::::$1,036,800
__________________________________$259,200
Less:
Purchase ($30,000 + $51,800)::::::::::::::::::$81,800
Advertising($500* 60=$30,000)::::::::::::::::::$30,000
_________________________________________
Revenue::::::::::::::::::::::::::::::::::::::::::$1,767,400
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Particulars ::::::::::::::::::::LF:::::::::::::::Debit::::::::::::::::::::::::::::Credit
Cash:::::::::::::::::::::::::::::::::::::::::::::::::$324,000
Notes Receivable:::::::::::::::::::::::::::::$1,296,000
Revenue ::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::$1,767,400
Unearned Revenue::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::$147,400
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