Problem:
On July 1, 2004, Ed Wyatt signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $120,000. Of this amount, $40,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $20,000 beginning July 1, 2005. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wyatt's credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:
Present value of 1 at 14% for 4 periods 0.59
Future value of 1 at 14% for 4 period 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91
Wyatt should record the acquisition cost of the franchise on July 1, 2004 at
a. $87,200.
b. $98,200.
c. $120,000.
d. $135,200.