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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Mystic Pizza Company purchases a franchise from NY Pizzeria Inc. for $96,000 on June 1, 2019. The franchise will last 8 years. Record Mystic Pizza’s purchase of the franchise on June 1 and adjusting entry at the end of 2019.

To determine

Prepare journal entry to record the purchase of franchise on June 1 and adjusting entry at the end of 2019.

Explanation

Franchise: Franchise is a type of business organization in which the owner (franchisor) grants legal right to an individual or company (franchisee) to sell goods and services of the franchisor, in some particular geographical areas.

Prepare journal entry to record the purchase of franchise on June 1 and adjusting entry at the end of 2019 as follows:

Prepare journal entry to record the purchase of franchise on June 1:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
June 1, 2019Franchise 96,000 
 Cash  96,000
 (To record the purchase of franchisee for cash)   

Table (1)

  • Franchise is an asset account and it increases the value of assets. Therefore, debit the franchise account with $96,000.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $96,000.

Prepare adjusting entry to record the amortization expense of franchise at the end of 2019.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Amortization expense (1) 7,000 
     Franchise  7,000
 (To record the amortization expense incurred)   

Table (2)

  • Amortization expense is component of shareholders’ equity, and it decreases the value of shareholders equity...

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