Pizza Pie Inc. entered into a franchise agreement on December 31, 2029, giving Freshly Bake Corp. the right to operate as a franchise of Pizza Pie for 5 years. Pizza Pie charged Freshly Bake an initial franchise fee of P50,000 for the right to operate as a franchisee. Of this amount P20,000 is payable when the food fight signs the agreement, and the note balance is payable in five annual payments of P6,000 each starting on December 31, 2020, as part of the arrangement. Pizza helps locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide employee training and the equipment necessary to be a distributor of its products. Similar training services and equipment are sold separately.
Freshly Bake also promises to pay ongoing royalty payments of 1% of its annual sales (payable each Jan. 31 of the following year) and is obliged to purchase products from pizza at its current stand-alone selling price at the same time of purchase. The credit rating of Freshly Bake indicates that the money can be borrowed at 8%. The PV of an ordinary annuity of 5 annual receipts of P6,000 each discounted at 8% is 23,957. The discount of 6,043 represents the interest revenue to be accrued by pizza over the payment period.
The allocation of transaction price is as follows: Rights to the trade name, market area, and proprietary know-how P20,000; Training service P9,957 and Equipment (cost of P10,000) P14,000.
Training is completed in January 2030, the equipment is installed in January 2030, and Freshly Bake grand opening is Feb. 2, 2030. For the year ended December 31, 2030, the franchisee reported sales revenue amounting to P525,000.
What is the journal entry on December 31, 2029?

Question 18Answer

Cash 20,000; Notes Receivable 30,000 Cr. Unearned Franchise Revenue 20,000; Unearned Service Revenue (training) 9,957; Unearned Sales Revenue (equipment) 14,000; Unearned Interest Income 6,043

 

 

Dr. Cash 20,000;Notes Receivable, 23,957 Cr. Unearned Franchise Revenue 20,000;Unearned Service Revenue (training) 9,957;Unearned Sales Revenue (equipment) 14,000

 

 

Cash 20,000; Notes Receivable 23,957 Cr. Unearned Interest Income 6,043; Unearned Franchise Revenue 37,914

 

 

Cash 20,000; Notes Receivable 30,000 Cr.Unearned Interest Income 6,043; Unearned Franchise Revenue 43,957