Question

Exercise 18-39

On January 1, 2020, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Bonita Inc. for an initial franchise fee of $51,000. The amount of $11,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2021. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2020. Lesley Benjamin’s credit rating indicates that she can borrow money at 9% for a loan of this type.

Prepare journal entries for Bonita for 2020-related revenue for this franchise arrangement.

Date Account Titles and Explanation Debit Credit Jan. 1, 2020

Prepare journal entries for Bonita for 2020-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Bonita also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of $3,200.

Repeat the requirements for part (a), assuming that Bonita must provide services to Benjamin throughout the franchise period to maintain the franchise value.

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Answer 1

(a) Journal entries for Bonita for 2020-related revenue for this franchise arrangement.

Date	Account Titles and explanation	Debit (in $)	Credit (in $)
01-01-20	Bank	11,000.00
	Franchisee Income		11,000.00
	(Receipt of Initial Non refundable Franchisee fees from Lesley benjamin)
01-04-20	Lesley Benjamin	40,000.00
	Franchisee Income		40,000.00
	(Balance Franchisee fees due on commencement of franchisee payable in 5 annual instalments)
01-04-20	Franchisee Income	8,215.75
	Leslee Benjamin		8,215.75
	(Deferment of Finance fee income on discounting to Present value as on commencement of franchisee conidering interest rate at 9%)

b) Journal entries for Bonita for 2020-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Bonita also provides 1 year of operational consulting and training services, beginning on the signing date.

Date	Account Titles and explanation	Debit (in $)	Credit (in $)
01-01-20	Bank	11,000.00
	Franchisee Income		11,000.00
	(Receipt of Initial Non refundable Franchisee fees from Lesley benjamin)
01-04-20	Lesley Benjamin	40,000.00
	Franchisee Income		40,000.00
	(Balance Franchisee fees due on commencement of franchisee payable in 5 annual instalments)
01-04-20	Franchisee Income	8,215.75
	Leslee Benjamin		8,215.75
	(Deferment of Finance fee income on discounting to Present value as on commencement of franchisee conidering interest rate at 9%)
31-12-20	Bank	3,200.00
	Operational consulting and training services revenue		3,200.00
	Recognition of Operational consulting and training service revenue On completion of 1 year period
31-12-20	Leslee Benjamin	2,132.17
	Franchisee Income		2,132.17
	(Finance interest recognised as revenue)

Part C) Repeat the requirements for part (a), assuming that Bonita must provide services to Benjamin throughout the franchise period to maintain the franchise value.

Date	Account Titles and explanation	Debit (in $)	Credit (in $)
01-01-20	Bank	11,000.00
	Franchisee Income		11,000.00
	(Receipt of Initial Non refundable Franchisee fees from Lesley benjamin)
01-04-20	Lesley Benjamin	8,000.00
	Franchisee Income		8,000.00
	(1st year Franchisee fees due on commencement of franchisee )
01-04-20	Franchisee Income	502.92
	Leslee Benjamin		502.92
	(Deferment of Finance fee income on discounting to Present value as on commencement of franchisee conidering interest rate at 9%)
31-12-20	Leslee Benjamin	502.92
	Franchisee Income		502.92
	(Finance interest recognised as revenue on year end)