Question

On January 1, 2020, Indigo signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $80,000. Of this amount, $16,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $16,000 each, beginning January 1, 2021. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2020, of the 4 annual payments discounted at 12% (the implicit rate for a loan of this type) is $48,600. The agreement also provides that 8% of the revenue from the franchise must be paid to the franchisor annually. Indigo’s revenue from the franchise for 2020 was $950,000. Indigo estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)

Answer 1

Answer:

franchise (intangible) 58,140

franchise fee              82,460

Explanation:

we need to calculate the  franchise intangible and franchise fee:

16,000 down payment

48,600 PV of the franchise payment

64,600 franchise(intangible assets)

amortized over 10 years using straight-line:

amortization: 64,600 / 10 = 6,460

year-end intangible:

64,600  -  6,460 = 58,140

fee based on sales: 950,000 x 8% = 76,000

total franchise fee: 76,000 for sales + 6,460 amortization= 82,460