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On July 1, 2018, Flat Co
On July 1, 2018, Flat Co. signed an agreement to operate as a franchise of Gas Co. for an initial franchise fee of P1,200,000. On the same date, Flat paid P400,000 and agreed to pay the balance in four equal payments of P200,000 beginning July 1, 2019. The down payment is not refundable and no future services are required of the franchisor. Flat can borrow at 14% for a loan of this type. If the franchise has definite life of 20 years, what is the carrying value of the franchise to be reported on the December 31, 2020 balance sheet?
a. P 859,950
b. P 908,350
c. P1,110,000
d. P1,352,000
Please include a step-by-step explanation and solution.
Expert Solution
The correct answer is
a) 859950
Explaination
Carrying value of franchise as on 31 december 2020
= (present value of payment as on 1 july 2018) / life *remaining life
= (400000+(200000*((1-(1.14)^-4)/.14)))/20*(20-2.5)
= P 859950
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