Advance Financial Accounting and Reporting

FRANCHISE
IAS 18
1. On January 1, 2020, FRANK entered into a franchise agreement with JAY to market their
products. The agreement provides for an initial fee of P12,500,000 payable as follows: P3,500,000
to be paid upon signing of the contract and the balance in five equal annual payments every end
of the year starting December 31, 2020. FRANK signs a non- interest bearing note for the
balance. His credit rating indicates that he can borrow money at 15% interest for a loan of this
type. The present value of an annuity of P1 at 15% for 5 periods is 3.352. The agreement further
provides that the franchisee must pay a continuing franchise fee equal to 3% of the monthly gross
sales. On August 31, the franchiser completed the initial services required in the contract at a cost
of P4,290,120 and incurred indirect cost of P175,000. The franchisee commenced business
operations on November 30, 2020. The gross sales reported to the franchiser were P1,800,000 for
December, 2020. The first installment payment was made in due date.

1. Assume the collectibility of the note is not reasonably assured, how much is the net income for
the year ended, December 31, 2020?
a. 3,126,268
b. 3,201,268
c. 2,417,268
d. 3,072,268

2. Assume the collectibility of the note is reasonably certain, how much is the net income for the
year ended, December 31, 2020?
a. 9,438,880
b. 9,384,880
c. 6,027,520
d. 6,552,520

2. On July 1, 2020, McJo Inc., a franchisor, entered into a contract with a franchisee for the operation
of a restaurant. The franchise agreement provides that the franchisee shall pay a non-refundable
upfront franchise fee amounting to P2,500,000 with P500,000 payable at the signing of contract
and the balance payable in five equal semi-annual instalments every December 31 and June 30.
The franchisee issued a non-interest bearing note with effective interest rate of 10%. The present
value of the note receivable is P1,731,791. The collection of the note receivable is unlikely. The
franchise agreement further provides for the payment of on-going royalties equivalent to 3%
based on franchisee’s sales revenue.

During 2020, McJo Inc. has substantially performed the direct cost of services required by the
franchise in the amount of P1,785,433. In the same year, McJo Inc. has also incurred indirect cost
amounting to P10,000. For the years 2020 and 2021, the franchisee has reported sales revenue
amounting to P400,000 and P600,000, respectively.

1. What is the net income to be reported by McJo Inc. for the year ended December 31, 2020?
a. 278,307 c. 236,870
b. 251,272 d. 291,470

2. What is the net income to be reported by McJo Inc. for the year ended December 31, 2021?
a. 517,579 c. 278,307
b. 529,574 d. 378,307

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Advance Financial Accounting and Reporting
PFRS 15
Problem 3: On January 1, 20x1, Pizza Pie granted a franchise to a franchisee. The franchise
agreement required the franchisee to pay a nonrefundable upfront fee in the amount of P480,000.
The franchisee paid the nonrefundable upfront fee on January 1, 20x1.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the
following performance obligations:
 To construct the franchisee’s stall with stand-alone selling price of P250,000.

 To deliver equipment and supplies to the franchisee with stand-alone selling price of P100,000.

 To allow the franchisee to use the entity tradename for a period of 5 years starting January 1,
20x1 with stand-alone selling price of P150,000.

The tradename will be transferred at the inception of the contract; franchisee stall will be finished one
month after the contract together with the delivery of the equipment and supplies. The following
performance obligation are distinct goods and services each satisfied at point in time.

1. How much transaction price is allocated to Equipment?

2. How much revenue is recognized in 20x1

Problem 4: Interest Bearing Note

January 1, 20x1, McJo sells a franchise license for four years which requires an initial franchise fee of
P500,000. The license provides the customer the right to the tradename and secret formula which are
not considered distinct. The tradename and secret formula are not sold separately by McJO.
Therefore, it is considered as a single performance obligation. A down payment of P100,000 cash is
required and the balance to be covered by 10% notes, payable by the franchisee in four equal annual
payments. On January 5, McJo incurs a direct contract cost of P200,000. The license is transferred to
the customer on January 25, 20x1.

Required: Prepare the journal entries

Case 1: Right to use

Case 2: Right to Access

Problem 5: Texas Manok entered into a franchise agreement with Mang Pedro for an initial franchise
fee of P937,500 for 7 years on January 2, 20x1. Of this Of this amount, P187,500 was paid when the
agreement was signed and the balance payable in three annual payments beginning on December
31, 20x1. Mang Tomas signed a non-interest bearing note for the balance. Mang Pedro’s rating
indicates that he can borrow money at 18% for the loan of this type. Assume that substantial services
amounting to P292,000 had already been rendered by Texas Manok Products and that additional
indirect franchise cost of P12,500 was also incurred. PV factor is 2.17. On January 10, the entity
transferred the franchise license to Mang Tomas.

The entity determined that the license provides a customer a right to use the Intellectual Property and
the entity evaluates that the pre-opening Problem 4: Burger Queen entered into a five-year franchise
agreement with a franchisee on January 1, 20x1. As part of its franchise agreement, Burger Queen
requires the franchisee to pay a non-refundable upfront franchise fee of P950,000 upon opening a
restaurant and ongoing payment of royalties, based on 10% of franchisee’s sales. As part of the
franchise agreement, Burger Queen provides installation of cooking equipment, valued at P300,000,
which is the stand-alone selling price of the pre-opening services. In addition, the franchise
agreement includes a license of Intellectual Property such as Burger Queen’s trademark and trade
name to the franchisee.

Burger Queen has determined that the license provides a right to access the Intellectual Property
over time. Burger Queen has determined the stand-alone selling price of the license is P700,000. The
franchise agreement has a term of 5 years. On January 1, 20x1, the franchisee paid the non-
refundable upfront franchise fee of P950,000 to Burger Queen and on January 12 the franchise was
transferred to the franchisee.

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Advance Financial Accounting and Reporting
On January 10, 20x, Burger Queen already satisfied its performance obligation to supply and install
cooking equipment to the franchisee. For the year ended December 31, 20x1, the franchisee reported
sales revenue of P1,000,000.

Req. 1: Assume the promise goods and services are not distinct, how much is the total franchise
revenue on December 31, 20x1?

Req. 2: Using the information in #1, when should the entity recognized revenue from the P950,000
initial franchise fee?
a. Recognized the initial franchise fee in full as revenue on January 1, 20x1
b. Recognized the initial franchise fee in full as revenue on January 10, 20x1
c. Recognized the initial franchise fee in as revenue over the license period.
d. None of the above

Req. 3: Assume the promise goods and services are distinct, how much is the total franchise revenue
on December 31, 20x1?

Req. 4: Assume the entity determined that the license provides a customer a right to use the
Intellectual Property and the entity evaluates that the pre-opening services and license of intellectual
property is distinct. How much is the total revenue from franchise on December 31, 20x1?

Req. 5: Using the information in #3, how should the entity recognized revenue from the 10%
continuing franchise fee?
a. The entity shall estimate the amount of the variable consideration and amortize the revenue over
the license period.
b. The entity shall recognize revenue equal to 10% of sale of the franchisee and recognized it when
the sales occur
c. Both a and B
d. None of the choices

Req. 6: Assume the entity determined that the license provides a customer a right to use the
Intellectual Property and the promise good and services are not distinct, when should the entity
recognized revenue from the P950,000 initial franchise fee?
a. Recognized the initial franchise fee in full as revenue on January 1, 20x1
b. Recognized the initial franchise fee in full as revenue on January 12, 20x1
c. Recognized the initial franchise fee in full as revenue on January 10, 20x1
d. Recognized the initial franchise fee in as revenue over the license period.

Problem 6: Texas Manok entered into a franchise agreement with Mang Pedro for an initial franchise
fee of P937,500 for 7 years on January 2, 20x1. Of this Of this amount, P187,500 was paid when the
agreement was signed and the balance payable in three annual payments beginning on December
31, 20x1. Mang Tomas signed a non-interest bearing note for the balance. Mang Pedro’s rating
indicates that he can borrow money at 18% for the loan of this type. Assume that substantial services
amounting to P292,000 had already been rendered by Texas Manok Products and that additional
indirect franchise cost of P12,500 was also incurred. PV factor is 2.17. On January 10, the entity
transferred the franchise license to Mang Tomas.

The entity determined that the license provides a customer a right to use the Intellectual Property and
the entity evaluates that the pre-opening services and license of intellectual property is not distinct
and treated it as a single performance obligation.

Req. 1: If the collection of the note is significantly uncertain, what is the franchise revenue for the year
ended December 31, 20x1?
a. P0 c. P289,060
b. P730,000 d. P97,650

Req. 2: Assuming the entity provides the customer a right to access the intellectual property and the
collection of the note is significantly uncertain, what is the total revenue recognized for the year ended
December 31, 20x1?
a. P0 c. P97,650
b. P201,936 d. P104,286
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Advance Financial Accounting and Reporting

CONSIGNMENT

Uratex Corporation delivered 10 beds to XYZ Company on consignment. The cost of each bed is
P7,500 and are to be sold at P12,500 each. Uratex paid the freight cost of P6,250.

XYZ submitted an account sale stating that it had returned one (1) unit and remitted P54,750. This
amount of cash remittance is net of the following deduction:

Commission 20% of selling price ?

Delivery and installation 1,500
Advertising 2,500
Cartage cost of consigned goods 1,250

Required: Compute the following

a. The number of units sold
b. The cost of inventory on consignment and the net income of Uratex Corporation

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