Reference no: EM132594256

ABC, a franchisor, whose fiscal year ends on July 31, entered into franchise agreement with DEF, a franchisee, on July 1, 2017. The total franchise fee agreed upon is 550,000; 50,000 is payable when the contract is signed and a non-interest bearing note requiring four equal annual installments for the balance. It was agreed that the down payment is not refundable notwithstanding lack of substantial performance of services by the franchisor. The direct franchise cost incurred was 325,000 while indirect franchise expense of 31,250 was also incurred. The management of DEF has estimated that they can borrow a loan of this type a the rate of 12%. The franchise commenced its operations on July 31, 2017.

Question 1: How much is the net income (loss) to be reported by ABC?