Pasta Inn Charges an Initial Fee of $1,600,000 for a Franchise

question 37

Essay

Pasta Inn charges an initial fee of $1,600,000 for a franchise, with $320,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $1,014,000. The franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000. 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 $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.
InstructionsPrepare the entry to record the initial franchise fee. Show supporting computations in good form.

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Definitions:

Subcontractors

Independent entities hired by a primary contractor to perform a specific task as part of a larger project.

Distribution Center

A facility for the receipt, storage, and redistribution of goods to company stores or customers; may be operated by retailers, manufacturers, or distribution specialists.

Production Center

A facility or area dedicated to manufacturing or producing goods, often focused on efficiency, output, and meeting organizational production goals.

Marketing Mix

A set of actions, or tactics, that a company uses to promote its brand or product in the market, often summed up by the four Ps: product, price, place, and promotion.