Cheese Ahead Frankie's Homemade Cheese Shop (Frankie's) signed an advertising agreement with Simmons Boards (Owner) for billboard advertising rights along Route 33 in the town
Cheese Ahead Frankie's Homemade Cheese Shop ("Frankie's") signed an advertising agreement with Simmons Boards ("Owner") for billboard advertising rights along Route 33 in the town of Hampton. Frankie's has the right to select and display advertising copy on billboard panels numbered 10 and 12 (panel numbers correspond to designated billboard locations) for a 3-year period from Jan. 1, 20X1, to Dec. 31, 20X3. In consideration for these rights, Frankie's agrees to pay $10,000 in year 1, $12,000 in year 2, and $13,000 in year 3. Assume that Frankie's is required to pay the annual fee on Jan. 1 of each contract year. Assuming Frankie's incremental borrowing rate is 5%, what are the entries Frankie should record at inception of the contract, then at the end of years 1, 2, and 3?
Making the Cheese Refer to the previous case study. Now evaluate the entries that Simmons Boards should record at inception of the advertising agreement with Frankie's, as well as at the end of each contract year
Hide
B C K M N TU A W N - Year Date 1 Jan 20X1 Payment PV factor @ 5% PV of Payment Opening Asset value Amortization Closing Net asset value Liability payable Interest Total payable Amount Paid Closing liability 10,00 1.000 1 1 Jan 20X 10,000 33,220 11,073 22,14 12,000 33,220 1,161.00 34,380.95 0.952 11,429 22,147 10,00 2 1 Jan 20X3 11,073 11,073 24,380.95 13,000 0.907 24,380.95 619.05 11,073 25,000.00 12,00 13,000.00 11,791 11,073 13,000.00 0.00 83,220 13,000.00 13,000 Journal Entries Date Account Dr Cr 10 1 Jan 20X1 Advertising Right Asset Ac D 33,220 11 Amount Payable for Advertising rights Ac Cr 33,220 12 13 14 1 Jan 20X1 Amount Payable for Advertising rights Ac Dr 10,000 Bank Ac Cr 10,000 15 16 31 Dec 20X1 Interest on Advertising rights payable Ac Dr 1,161.00 17 Amount Payable for Advertising rights Ac Cr 1,161 18 19 1 Jan 20X2 Amount Payable for Advertising rights Ac Dr 12,000 20 Bank Ac Cr 12,000 21 22 23 31 Dec 20X2 Interest on Advertising rights payable Ac Dr 619.05 24 Amount Payable for Advertising rights Ac Cr 619.05 25 1 Jan 20X3 26 Amount Payable for Advertising rights Ac Dr 13,000 Bank Ac Cr 13,000 A B D E G H K M N N Year Date Payment PV factor @ 5% PV of Payment Opening Asset value Amortization Closing Net asset value Liability payable 0 1 Jan 20X1 10000 =1/1.05^B3 =D3*E3 Interest Total payable Amount Paid Closing liability 1 Jan 20X =G3/3 =G3-H3 2000 =1/1.05^B4 =F6 =G3 =13 =G4-H4 (J3-M3)*5% =J3+K3 =D3 =L3-M3 =H3 1 Jan 20X3 13000 =1/1.05^B5 =D5*E5 =14 =(J4-M4)*5% =14+K4 =H4 =G5-H5 =D4 =L4-M4 =N4 =SUM(F3:F5) -(J5-M5)*5% =15+K5 =D5 =L5-M 8 Journal Entries Date Account Dr Cr 10 =C3 Advertising Right Asset Ac D =F6 11 Amount Payable for Advertising rights Ac Cr =D10 12 13 =B10 Amount Payable for Advertising rights Ac Dr =D3 14 |Bank Ac Cr =D13 15 16 31 Dec 20X1 |Interest on Advertising rights payable Ac Dr =K3 17 Amount Payable for Advertising rights Ac Cr =D16 18 19 1 Jan 20X2 Amount Payable for Advertising rights Ac Dr =D4 20 Bank Ac C D19 21 22 23 31 Dec 20X2 Interest on Advertising rights payable Ac Dr =K4 Amount Payable for Advertising rights Ac Cr 24 =D22 25 1 Jan 20X3 Amount Payable for Advertising rights Ac Dr =D5 26 Bank Ac Cr =D25