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1a) Each of ABC Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of $30,000. By December 31, 2011, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 2012, and December 31, 2013. Experience indicates that one franchisee will default on the additional payments. Services for the initial fee will be performed in 2012.
Question: What amount of net unearned franchise fees would ABC report at December 31, 2011?
1b) Sony Construction Company has been operating in Pennsylvania for a number of years. During 2011, the firm contracted with the Borough of Lewisburg to build a domed sports complex. Sony estimated that it would take three years to complete the facility at a total cost of $25 million. The total contract price was $30 million. During 2011, construction costs of $8.5 million were incurred related to the sports complex, including
$500,000 in materials purchased in 2011 but not yet used; estimated additional costs to complete the project were $15.5 million as of December 31, 2011. Contract billings through December 31, 2011, were $9 million of which the Borough of Lewisburg had paid $7.5 million.
Requirement (1b1): Prepare schedules to calculate the amount of income to be recognized by Sony Construction on the sports complex for the year ended December 31, 2011, using each of the following methods:
a. Completed-contract method.
b. Percentage-of-completion method.
Requirement (1b2): Prepare all necessary journal entries related to the project for 2011 assuming:
a. The percentage-of-completion method is appropriate.
b. The completed-contract method is appropriate.
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