Franchise Accounting

Franchise Items 1 to 5 are based on the following information: Assume that AntonTech starts selling TechStop franchises. TrueTech charges. Franchisees an initial fee in exchange for (a) the exclusive right to operate the only TechStop in a particular area for a five-year period, (b) the equipment necessary to distribute and repair AntonTech products, and (c) training services to be provided over a two-year period. Similar equipment and training can be purchased elsewhere. 1. How many performance obligations exist in this contract? a. 0 b. 1 c. 2 d. 3 Answer: 1. dThe exclusive five-year right to operate the only TechStop in a particular area is distinct because it can be used with other goods or services (furnishings, equipment,products) that the customer could obtain elsewhere. The equipment is distinct because similar equipment is sold separately. The training is distinct because similar training could be acquired elsewhere. AntonTech would allocate the initial franchise fee to three separate performance obligations based on their relative stand-alone prices: (1) the right to operate a TechStop, (2) equipment, and (3) training. 2.AntonTech should recognize revenue for the right to operate a Techshop? a. No transaction b. No revenue c. Point in time d. Over time Answer: 2.d- AntonTech would recognize revenue for the right to operate a TechStop over the five- year license period, because AntonTech's ongoing activities over the license period affect the value of the right to run a TechStop. 3. AntonTech should recognize revenue for the equipment? a. No transaction b. No revenue c. Point in Time d. Over Time Answer: 3. c -AntonTech would recognize revenue for the equipment at the time the equipment is delivered to the franchisee, 4. AntonTech should recognize revenue for the training? a. No transaction b. No revenue c. Point in Time d. Over Time Answer: 4. d -recognize revenue for the iraining over the two-year period that the training is provided. 5. What if AntonTech also charges franchise es an additional fee for ongoing services providedby the company, the additional fee be recognize as revenue? a. No transaction b. No revenue c. Point in Time d. Over Time Answer: 5. d- In that case, AntonTech would recognize revenue associated with that fee over time

Items 6 to 8 are based on the following information: Dominador's Pizza Inc. enters into a franchise agreement on December 31, 20x7 giving Doming Corp. the right to operate as a franchisee of Dominador's Pizza for 5 years. Dominador's charges Doming an initial franchise fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when Doming Corp. signs the agreement, and the balance is payable in five annual payments of P57,000 each on December 31 Consider the following for allocation of the transaction price at December 31, 20x7. Rights to the trade name, market area, technical and proprietary know-how……………………………….…......P190,000.00 Services-training,e tc………………………………………...94,591.50 Machinery and equipments, etc. (costing, P95,000)……..133,000.00 Total transaction price…………………………………….. P417,591.50 The credit rating of Doming indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P57,000 each discounted at 8% is P227,591.50. The discount of P57,408.50 represents the interest revenue to be accrued by Dominador 's Pizza Inc. over the payment period. Training is completed in January 20x8, the equipment is installed in January 20x8, and Doming holds a grand opening on February 4, 20x8. On February 4, 20x8, franchise opens. Doming also promises to pay ongoing royalty payments of 1% of its annual sales products from Dominador's at its current stand-alone selling prices at the time of purchase. (payable every January 31 of the following year) and is obliged to purchase 6. How many performance obligations exist in this contract for franchise? a. 2 b. 3 c. 4 d. 5 Answer: 6. b- There are three performance obligations in the contract for, franchise: 1. Rights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct. Each one is not sold separately and cannot be used with other goods or services that are readily available to the franchisee. Combined rights give rise to a single performance obligation. 2. Training services, and 3. Equipment It should be noted that training (similar) services and equipment are distinct and can be sold separately. Dominador's cannot recognize revenue for the royalty payments because it is not reasonably assured to be entitled to those sales-royalty amounts. That is, these payments represent variable consideration (reter fo Chapter 3 for discUSsion on variable consideration! Therefore. Dominador's recognizes revenue for the royalties when (or as) the uncertainty is resolved. Dominador's promise to stand ready to provide products to the franchisee in the future at a standalone selling price is not accounted for as a separate performance obligation in the contract because it does not provide Doming with a material right (refer to Chapter 3 for discussion on material right). Thus, revenue from those sales is recorded in the future when the sales are made.

7. When Dominador should recognize revenue for the rights (combined) to the trade name, market area and proprietary know-how which give rise to a single performance obligation? a. No transaction b. No revenue c. Point in time d. Over time Answer: 7. c- Those combined rights (trade name, market areas and proprietary know-how) give rise to a single performance obligation. Dominador's satisfies performance obligation at point in time when Doming obtains control of the rights. That is, once Doming begins operating the store. Dominador has no further obligation with respect to these rights. It should be noted that training (similar) services and equipment are distinct and can be

sold separately Dominador's satisfies those performance obligations (servi es and equipment) when it transfer the services and equipment to Doming. 8. How much revenue (franchise revenue, service revenue and sales revenue -machinery and equipments) be recognized on December 31, 20x7? a. Zero. b. P 94,591.50 c. P133,000.00 d. P190,000.00 Answer: 8. a- As of December 31, 20x7, only signing of agreement and receipts of upfront payment and note were made. The entries on December 31, 20x7: Dominador's signs the agreement and receives upfront payment and note. Cash 190,000.00 Notes receivable 285,000.00 Unearned interest income (or Discount on notes receivable 57.408.50 Unearned franchise revenue 190,000,00 Unearned service revenue training, etc.. 94,591.50 Unearned sales revenue machinery and equipment, etc. 133,000.00

9. How much revenue (franchise revenue, service revenue and sales revenue -machinery and equipment) be recognized on February 4, 20x83 a. P 94,591.50 b. P133,000.00 c. P190,000.00 d. P417,591.50 Answer: 9. d February 4, 20x8: Franchise opens. Dominador's satisfies the performance obligations related to the franchise rights, training and equipment. That is, Dominador's has no further obligations related to these elements of the franchise. Unearned franchise revenue 90,000.00 Franchise revenue 190.000.00 Unearned service revenue training, etc 94,591.50 Service revenue - training, etc. 94,591.50 Unearned sales revenue – machinery and equipment, etc. . 133,000.0 Sales revenue 133,000.00 Cost of goods sold. 95,000.00 Inventory .... 95,000.00

As indicated, when Doming begins operations, Dominador's Pizza satisfies the performance obligations related to the franchise rights, training and equipment under the franchise agreement. That is, Dominador's has no further obligations related to these elements of the franchise. 10. How much continuing franchise revenue be recognized on December 31 20x8, assuming the sales of P4,987,500 was generated for the first year of operations? Zero. b. P48,875.00 c. P190,000.00 d. P417,591.50 Answer: 10. b -December 31, 20x8: To record,continuing franchise fees:

Accounts receivable (P4,987,500) x 1%) 48,875.00 Franchise revenue .... 48,875.00 December 31, 20x8: To record payment recelved and interest income on note: Cash... 94,591.50 Notes receivable .. 94,591.50 Unearned interest income (or Discount on notes receivable).... 18,207.32 Interest income (P227,591.50 x 8%). 18.207.32 Recognition of Franchise Rights Revenue Over Time Depending on the economic substance of the rights, the franchisor may be providing access to the right rather than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a point in time. Items 11 to 14 are based on the following information: Xaviery Computers is a franchisor and provides a range of computing services hardware/software installation, repairs, data backup, device syncing, and network solutions) on popular Samsung, Dell, Acer and other PC devices. Each franchise agreement gives a franchisee the right to opena Xaviery outlet and sell Xavierys' products and services in the area for five (5) years. Under the contract Xaviery also provides the franchisee with a number of services to support and enhance the franchise brand, including: advising and consulting on the operations of the store; communicating new hardware and software developments, and service techniques; providing business and training manuals; and advertising programs and training. As an almost entirely service operation (all materials and other supplies are purchased as needed by customers), Xaviery provides few upfront services to franchisees. Instead, the franchisee recruits service technicians, who are given Xavierys' training materials (online manuals and tutorials), which are updated for technology changes, on a monthly basis at a minimum. Xaviery enters into a franchise agreement on December 15, 20x7, giving a franchisee the rights to operate a Xaviery franchise in Cagayan Valley for five (5) years. Xaviery charges an initial franchise fee of P975,000 for the right to operate as a franchisee, payable upon signing the contract. Xaviery also receives ongoing royalty payments of 7% of the franchisee 's annual sales (payable each January 11 of the following year). 11. How many performance obligations exist in this contract for franchise? a. none b. 1 c. 2 d. 3 Answer: 11. b- Rights to the trade name. market area, and proprietary know-how for 5 years are not individually distinct because each one is not sold separately and cannot be used with other goods or services that are readily available to the franchisee. In addition, these licensed rights have a close connection with the underlying Xaviery's intellectual property (it ability to keep its service and training materials up to date). Therefore, those combined rights and the ongoing training materials are a single performance obligation. 12. The franchise revenue should be recognized: a. No transaction b. No revenue c. Point in time d. Over time Answer: 12. d Xaviery satisfies the performance obligation over time. That is, once the franchisee

begins its operating a Xaviery franchise, Xaviery is providing access to the rights and must continue to perform updates and services. Xaviery Computers cannot recognize revenue for the royalty payments Not reasonably assured to be entitled to those revenue-based royalty amounts. Payments represent variable consideration. Recognize revenue for royalties when (or as) uncertainty is resolved. As indicated, Xaviery satisfies the performance obligations related to the access to the franchise rights and training materials over time (on this case, on a straight-line basis. Continuing franchise fees are recognized when uncertainty related to the variable consideration is resolved. In summary, analysis of the characteristics of the Xaviery franchise indicates that it does not reflect a right that is transferred at a point in time. That is, Xaviery has a continuing obligation to provide updated materials and ongoing support, suggesting the control of the right has not been transferred to the franchisee. Thus, revenue from the franchise rights is recognized over time. 13. The franchise revenue on December 31,20x7 should be: a. None b. P195,000 c. P 975,000 d. P1,160,250 Answer: 13. a -December 15, 20x7: Franchise agreement signed and receipt of upfront payment and note: Cash 975,000 Unearned franchise revenue 975.000 14. The franchise revenue on December 31, 20x8 should be: a. P 195,000 b. P975,000 c. P1,160,250 d. P1,355,250 Answer: 14. d -December 31, 20x8: Franchise begins operations in January 20x8 and records P16,575,000 of revenue for the year ended December 31, 20x8: Unearned franchise revenue.. 195.000 Franchise revenue (P975,000/5) 195,000 Accounts receivable (7% x P16,575,000). 1,160,250 Franchise revenue.. 1,160,250 Items 15 to 10 are based on the following information: Joey Monitor Muffler sells franchise arrangements throughout Luzon and Visayas Under a franchise agreement, Joey receives P600,000 in exchange for satisfying the following separate performance obligations: franchisees have a five-year right to operate as a Joey Monitor Muffler retail establishment in an exclusive sales territory franchisees receive initial training and certification as a Joey Monitor Mechanic, and franchisees receive a Joey Monitor Muffler building and necessary equipment. The stand-alone selling price of the initial training and certification is P15,000, and P450,000 for the building and equipment. Joey estimates the stand-alone selling price of the five-year right to operate as a Joey Monitor establishment using the residual approach. Joey Monitor received P75,000 on July 1, 20x6, from Althea and accepted a note receivable for the rest of the franchise price. Joey Monitor will construct and equip Altheas' building and train and certify Althea by September 1, and Altheas' five-year right to operate as a Joey. Monitor establishment will commence on September 1 as well. 15. What amount would Joey calculate as the stand-alone selling price of the five year right to operate as a Joey Monitor retail establishment? a. P135,000 b. P150,000

c. P585,000 d. P600,000 Answer: 15. a Total amount of franchise agreement P 600,000 Less: stand-alone selling price of training (15,000) Less: stand-alone selling price of building and equip. (450,000) Stand-alone selling price of five-year right P 135,000 16. What journal entry would Joey Monitor record on July 1, 2016, to reflect the sale of a franchise to Althea? a. Cash ……………………………………………………..600,000 Unearned franchise revenue …………………….. 600,000 b. Cash ……………………………………………………..75,000 Notes receivable..............................................................525,000 Unearned franchise revenue……………………… 600,000 c. Cash………………………………………………………75,000 Notes receivable……………………………………………525,000 Franchise revenue…………………………………. 75,000 Unearned franchise revenue................................. 525,000 d. Cash.............................................................................75,000 Notes receivable…………………………………………….525,000 Franchise revenue………………………………….. 600,000 Answer: 16. b-As of July 1, 20x6, Joey Monitor has not fulfilled any of its performance obligatons, so the entire P600,000 franchise fee is recorded as deferred revenue. Cash. 75,000 Notes receivable ... 525,000 Deferred revenue.. 600,000 17. How much revenue would Joey Monitor recognize in the year ended. December 31, 20x6, with respect to its franchise arrangement with Althea? (Ignore any interest on the note receivable.) a. P 9,000 b. P450,000 c. P465,000 d. P474,000 Answer: 17. d On September 1, 20x6, Joey Monitor has satisfied its performance obligations with respect to training and certifying Perkins and delivering an equipped Joey Monitor building, Therefore, Joey Monitor should recognize revenue of P15,000 + P450,000 P465,000 on that date. In addition, by December 31, 20x6. Joey Monitor has earned 4 months of revenue (September December) associated with the five-year right it granted to Althea, so Joey Monitor should recognize revenue of P135,000 x (4+ (5 x 12)) = P9,000 associated with that right. Total revenue recognized for the year ended December 31, 20x6, is P465,000+ P9.000 = P474,000. 18. TopChop sells hairstyling franchises. TopChop receives P50,000 from a new franchisee for providing initial training, equipment and furnishings that have a stand-alone selling price of P50,000. TopChop also receives P30,000 per year for use of the TopChop name and for ongoing consulting services (starting on the date the franchise is purchased). Carlos became a TopChop franchisee on July 1, 20x6, and on August 1, 20x6, had completed training and was open for business. How much revenue in 20x6 will TopChop recognize for its arrangement with Carlos? a. Zero b. P10,000 c. P65,000 d. P70,000 Answer:

18. c -Because Carlos had completed training and was open for business on August 1, 20x6, TopChop apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize P50,000 of revenue in 20x6. In addition, since Carlos was a franchisee for the last six months of 20x6, TopChop should recognize 6 12= 50% of a yearly fee of P30,000, or P15,000. In total, TopChop recognizes revenue from Carlos of P50,000 P15,000 = P65,000 in 20x6 19. Pita Pal sells fast-food franchises, Pita Pal receives P75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of P75,000. Pita Pal also receives P36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 20x6, and on May 1, 20x6 Rachel had completed training and was open for business. How much revenue in 20x6 will Pita Pal recognize for its arrangement with Rachel? a. Zero b. 75,000 c. P 99,000 d. P111,000 Answer: 19.c -Because Rachel had completed training and was open for business on May 1, 20x6, Pita Pal apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize P75,000 of reevenue in 20x6. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last eight mon ths of 20x6, Pita Pal should recognize 8 12 = 2/3 of a yearly fee of P36,000, or P24,000. In total, Pita Pal recognizes revenue from Rachel of P75,000 + P24,000 = P99,000 in 20x6. Items 20 and 21 are based on the following information: 20. Hotel Dian Inc. charges an initial franchise fee of P90,000 broken down as follows: Rights to trade name, market area, and proprietary know-how P40,000 Training services 11,500 Equipment (cost of P10,800) 38,500 Total initial franchise fee P90,000 Upon signing of the agreement, a payment of P40,000 is due. Thereafter two annual payments of P30,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 20x4, and the franchise commences operation on November 1, 0x4. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 20x4 would include a. a credit to Unearned Franchise Revenue for P40,000. b. a debit to Service Revenue for P11,500. c. a debit to Sales Revenue for P38,500. d. a debit to Unearned Franchise Revenue for P40,000 Answer: 20. d 21. Assuming that the franchise agreement is signed on August 1, 20x5, and the franchise commences operationon November 1, 20x5. Assume that the total training fees includes training services for the period leading up to the franchise opening (P5,500 value) and for 3 months following opening. The journal entry on August 1, 20x5 would include a. a credit to Unearned Service Revenue for P11,500 b. a credit to Unearned Service Revenue for P6,000. c. a debit to Sales Revenue for P38,500. d. a debit to Unearned Franchise Revenue for P40,000. Answer: 21. a 22. On January 1, 20x5 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the company to do business under Dairy Treats's name. Dairy Treats had performed substantially all required

services by January 1, 20x5, and the franchisee paid the initial franchise fee of P840,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of P72,000 annually, of which 20% must be spent on advertising by Dairy Treats. What entry should Dairy Treats make on January 1, 20x5 to record receipt of the initial franchise fee and the continuing franchise fee for 20x5? a. Cash………………………………………………………..….. 912,000 Franchise Fee Revenue................................................840,000 Revenue from Franchise Fees ………………………… 72,000 b. Cash ……………………………………………………………912.000 Unearned Franchise Fees………………………………. 912.000 c. Cash …………………………………………………………….912,000 Franchise Fee Revenue ................................................ 840,000 Revenue from Franchise Fees………………………….. 57,600 Unearned Franchise Fees………………………………. 14,400 d. Prepaid Advertising…………...…………………………………14,400 Cash………………………………………...…………………..912,000 Franchise Fee Revenue................................................ 840,000 Revenue from Franchise Fees…………………………. 72,000 Unearned Franchise Fees…………………………….... 14,400 Answer: 22. C Cash P840,000 + P72,000 = P912,000 Franchise Fee Revenue = P840,000 Unearned Franchise Fees = P72,000 x 20% = P14,400 Revenue from Franchise Fees = P72,000 - P14,400 = P57,600 23. Wynne Inc. charges an initial franchise fee of P1,840,000, with P400,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is P1,091.744. The franchisee has the option to purchase P240,000 of equipment for P192,000. Wynne has substantially provided all initial services required and collectability of the payments is reasonably assured. The amount of revenue from franchise fees: a. P 400,000. b. P1,443,744. c. P1,491,744. d. PL840,000. Answer: 23. b- P400,000 + P1,091,744 - P48,000 = P1,443,744 24. Pasta Inn charges an initial fee of P1,600,000 for a franchise, with P320,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10% is P1,014,000. The franchisee has the right to purchase P60,000 of kitchen equipment and supplies for P50,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is P1,000 a month. Collectability of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract. How much revenue from franchise fee be recognized when the agreement is signed? a. Zero. b. P1,264,000 c. P1,590,000 d. P1,600,000 Answer: 24. (b) Total Franchise Fee Less: Unearned Interest Income Amount due .. Less: Present value of payments.. Bargain Purchase Option (P60,000-P50,000)

P1,600,000 P1,280,000 1,014,000 (266,000) (10,000)

Advertising (P1,000 x 60 months).. (60,000) Revenue from Franchise Fee PI,264,000 Items 25 and 26 are based on the following information: Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount P25,000 is collected immediately. The remainder is collected in four equal annual installments of P12,500 each. These installments have a present value of P41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of P2,000) to help franchisees get the store ready to open. The franchise agreement is signed of April 1, 20x5, training is completed, and the store opens on. July 1, 20x5. Incidentally, the entry would be as follows: Cash 320,000 Notes Receivable ..... 1,280,000 Unearned Interest Income/DiscOunt on Notes Receivable 266,000 Revenue from Franchise Fees.. 1.264,000 Unearned Franchise Fees 70,000

25. The amount of revenue from training and franchise on April 1, 20x5 to: a. Zero. b. P64,402 c. P66,402 d. P75,000 Answer: 25. a April 1, 20x5 Cash. 25,000 Notes Receivable (P75,000 P25,000) 50,000 Unearned Interest Income/Discount on Notes Receivable Unearned Service Revenue (training) Unearned Service Revenue (franchise) (P25,000+ P41,402 P2,000)

8,598 2,000 64.402

26. The amount of revenue from training and franchise on July 1, 20x5 to: a. Zero. b. P64,402 c. P66,402 d. P75,000 Answer: 26. C July 1, 20x5 Unearned Service Revenue (training) Unearned Service Revenue (franchise) Franchise Revenue Service Revenue (training)

2,000 64,402 64,402 2.000

Items 27 to 32 are based on the following information: Pacific Crossburgers Inc. charges an initial fee of P70,000. Upon the signing ofthe agreement (which covers 3 years), a payment of P28,000 is due. Thereafter, three annual payments of P14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement signed on May 1, 20x5, and the franchise commences operation on July 1, 20x5. 27. The amount of franchise revenue on May 1, 20x5 assuming no future services gre required by the franchisor or once the franchise starts operations a. Zero. b. P28,000 c. P62,816 d. P70,000 Answer:

27. a May 1, 20x5 Cash 28,000 Notes Receivable (P70,000 - P28,000) 42,000 Discount on Notes Receivable /Unearned Interest Income [P42,000) Unearned Franchise Revenue (P28,000 + P42,000 P7,184) (2.48685* x P14,000)

7,184 62,816

28. In relation to No. 27, the amount of franchise revenue on July 1, 20x5: a. Zero b. 28,000 c. P62,816 d. P70,000 Answer: 28. C July 1. 20x5 Unearned Franchise Revenue Franchise Revenue.

62,816 62.816

29. The amount of franchise revenue on May 1, 20x5 assuming that the franchisor has substantial services to perform, once the franchise begins operations to maintain the value of the franchise. a. Zero b. P28,000 c. P62,816 d. P70,000 Answer: 29. a -refer to Chapter 3 on discussion of Contract Liability May 1, 20x5 Cash 28,000 Notes Receivable (P70,000 P28,000) 42,000 Discount on Notes Receivable /Unearned Interest Income (42,000 - 2.48685* x P14,000) 7,184 Contract Liability (franchise) -(P28,000 +P42,000 P7,184) 62.816 30. In relation to No. 29, the amount of franchise revenue on December 31 20x5: a. Zero b. P13,959 c. P62,816 d. P70,000 Answer: 30. b- December 31, 20x5: (P62,816 3) x 8/12 P13,959 31. The amount of franchise revenue on May 1, 20x5, assuming that the total franchise fee includes training services (with a value of P2,400) for the period leading up to the franchise opening and for two (2) months following opening. a. Zero. b. P60,416 c. P62,816 d. P70,000 Answer: 31. a May 1, 20x5 Cash 28,000 Notes Receivable (P70,000 - P28,000) Discount on Notes Receivable /Unearned Interest Income

42,000 7,184

[P42,000 (2.48685* x P14,000)] Unearned Service Revenue (Training) Unearned Franchise Revenue (P28,000 + P42,000 P7,184 P2,400)

2,400 60,416

32. In relation to No. 31, the amount of franchise revenue on July 1, 20x5: a. Zero. b. P60,416 c. P61,616 d. P63,616 Answer: 32. b July 1, 20x5 Unearned Franchise Revenue Unearned Service Revenue (Training) P2.400/2 Franchise Revenue Service Revenue (Training)

60,416 1,200 60,416 1,200

33. In relation to Nos. 31 and 32, the amount of service revenue on September 1,20x5: a. Zero. b. P1,200 c. P 2,400 d. P70,000 Answer: 33. b September 1, 20x5 Unearned Service Revenue (Training) 1,200* Service Revenue (Calculations rounded). *Present value of ordinary annuity 3 years at 10%

1,200

Items 33 to 39 are based on the following information: 34. On January 1, 20x5, Lesley Benjamin signed an agreement (covering 5 years) to operate as a franchisee of Campbell Inc. for an initial franchise fee of P50,000. The amount of P10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of P8,000 each, beginning January 1,20x6. The agreement provides that the down payment is non-refundable and that no future services are required of the franchisor once the franchise commences operations on April 1,20X5. Lesley Benjamin's credit rating indicates that she can borrow money at 11% for a loan of this type. The amount of franchise revenue on January 1, 20x5: a.Zero. b. P10,433 c. P39,567 d. P50,000 Answer: 34. a January 1, 20x5: Cash 10,000 Notes Receivable. 40,000 Unearmed Interest Income/Discount on Notes Receivable... 10,433 Unearned Franchise Revenue (P10,000 + P29,567) 39,567* *Down payment made on 4/1/x5 P10,000.00 Present value of an ordinary annuity (P8,000 x 3.69590) 29,567.20 Total revenue recorded by Campbell and total acquisition cost recorded by Lesley Benjamin P39,567.20 35. The amount of franchise revenue on April 1, 20x5: a. Zero. b. P10,433

c. P39,567 d. P50,000 Answer: 35. C April 1, 20x5 Unearned franchise revenue Franchise revenue

39,567 39,567

36. For Campbell's 20x5-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of P3,600. The amount of franchise and service revenue on January 1, 20x5 amounted to a.Zero b. P10,433 c. P39,567 d. P50,000 Answer: 36. a – refer to No. 34 for further computation January 1, 20x5: Cash 10,000 Notes receivable 40,000 Unearned interest income/ discount on notes receivable 10,433 Unearned service revenue (training) 3,600 Unearned franchise revenue (10,000 = 29,567 – 3,600) 35.967* 37. In relation to No. 36, the amount of franchise revenue on April 1, 20x5: a. Zero. b. P35,967 c. P39,567 d. P50,000 Answer: 37. b April 1 20x5 Unearned franchise revenue Unearned service revenue (training) Franchise revenue Service revenue (training)

35,967 3,600 35,967 3,600

38. In relation to Nos. 36 and 37 the amount of service revenue for the year 20x5: a. Zero. b. P2,700 c. P3,600 d. P6,300 Answer: 38. d December 31, 20x5 Unearned service revenue (training) 2,700 Service revenue (training) P3,600 x 9/12 2,700 Therefore, the service revenue for the year 20x5 amounted to: April 1, 20x5 (no.36) 3,600 December 31, 20x5 (3,600 x 9/12) 2,700 Total 6,300 39. The amount of franchise revenue on January 1, 20x5 assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

a. Zero. b. P39,567 c. P50,000 d. P10,433 Answer: 39. a- refer to Chapter 3 on discussion of contract liability January 1, 20x5 Cash 10,000 Notes receivable 40,000 Unearned interest income/ discount on notes receivable 10,433 *down payment ,ade on 4/1/x5 10,000 Present value of an ordinary annuity (8,000 x 3.69590) 29,567.20 Total revenue recorded by Campbell and total acquisition cost recorded by Lesley Benjamin 39,567.20 40. In relation to No. 39, the amount of franchise revenue on December 31. 20x5: a. Zero b. P7,913 c. P39,567 d. P50,000 Answer: 40. b- December 32, 20x5: (P39,567 / 5) = P7,913 Items 41 to 43 are based on the following information: Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of Brazil. The contract with the franchise includes the following 1.The franchise is charged an initial fee of P120,000. Of this amount, interest-bearing note is payable at the end of each of the 5 subsequent provisions. P20.000 is payable when the agreement is signed, and a R20,000, zero 2. All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise. 3. In return, for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiable the lease for the land, (c) obtain financing and assist with building records, supervise construction, establish accounting and tax records, and (f) provide expert advise over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Amigos helps maintain the brand value of the franchise. 4. In addition to the initial franchise fee, the franchisee is required to pay toAmigos a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. 5. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least P20,000. All the franchisee to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current rate of 10%. The present value of an ordinary annuity of five annual receipts of P20,000 each discounted at 10% is P75,816. 41. The amount of franchise revenue assuming the franchise agreement is signed on January 5, 20x5. a. Zero b. 95,816 c. 100,000 d. 120,000 Answer: 41. b January 5,20x5 Cash Notes receivable

20,000 100,000

Unearned interest income/ discount on notes receivable (P100,000 – P75,816) Unearned franchise revenue (P20,000 = (20,000 x 3.79079)

24,184 95,816

42. In relation to No. 41, Amigos completes franchise startup tasks and the franchise opens on July 1, 20x5 the amount of franchise revenue: a. Zero b. 20,000 c. 95,816 d. 100,000 Answer: 42. b July 1, 20x5: To record revenue from delivery of franchise rights Unearned Franchise Revenue 20,000 Franchise Revenue 20,000 43. In relation to No. 41 and 42, the franchisee records P260,000 in sales in the first 6 months of operations (i,e., July 1 – December 31) and remits monthly franchise fee on December 31 20x5, the franchise revenue amounted to: a. Zero b. 5,200 c. 7,582 d. 12, 782 Answer: 43. d December 31, 20x5 Cash (P260,000 x 2 %) Franchise Revenue – continuing Unearned Franchise Revenue (P75,816 60 x 6) Franchise Revenue (ongoing fees for brand maintenance) Unearned interest income/discount on notes receivable Interest income (P75,816 x 10% x 6/12)

5,200 5,200 7,582 7,582 3,791 3,791

44. All revenue for franchise companies is derived from a. assistance for site selection and negotiating lease b. bookkeeping and advisory services. c. sale of initial franchise and continuing fees. d. advertising and promotion. Answer: 44. c 45. Franchise fees should be recognized a. on the date the contract was signed. b. on the date the franchise is opened for business. c. on the date the franchise fee is paid to franchisor. d. when performance obligations are satisfied. Answer: 45. d 46. Revenue for sales-based royalty payments should be recognized a. when the amount of sales can be determined. b. on the date payment is received by the franchisor. c. on the date the performance obligation is satisfied. d. on the date the contract was signed. Answer: 46. a

47. Franchise revenue are recognized over time if a. franchise rights are transferred at a point in time. b. the franchisor is providing access to the right rather than transferring control. c. performance obligations regarding franchise rights are completed when the franchise opens. d. the franchisee fee is payable upon signing of contract. Answer: 47. b 48. Types of franchising arrangements include all of the following except a. service sponsor-retailer. b. wholesaler-service sponsor. c. manufacturer-wholesaler. d. wholesaler-retailer. Answer: 48. b 49. Continuing franchise fees should be recorded by the franchisor a. as revenue when uncertainty related to the variable consideration is resolved. b. as revenue when received. c. in accordance with the accounting procedures specified in the franchise agreement.. d. as revenue only after the balance of the initial franchise fee has been collected. Answer: 49. a 50. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should a. increase revenue recognized from the initial franchise fee by the amount of the expected future purchases. b. record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases. c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are made. d. None of these answer choices are correct. Answer: 50. b 51. Franchise revenues are recognized over time it a. franchise rights are transferred at a point in time. b. the franchisee fee is payable upon signing of contract. c. performance obligations regarding franchise rights are completed when the franchise opens. d. None of these answer choices are correct. Answer: 51. b 52. Which of the following is not true about accounting for revenue from franchise arrangements? a. Franchise arrangements often include a performance obligation for a license as well as for delivery of goods and services. b. Franchise arrangements typically include one performance obligation because the goods and services included in the arrangement are not separately identifiable c. Franchise arrangements typically include one or more performance obligations for which revenue is recognized at a point in time. d. Franchise arrangements typically include one or more performance obligations for which revenue is recognized over a period of time. Answer:

52. . d Franchise arrangements typically include multiple performance obligations because the goods and services included in the arrangement are both capable of being distinct and are separately identifiable PFRS for Small and Medium-Sided Entities (SMES) – Franchise Full PFRSS and PFRS for SMES share the same principles for accounting and reporting. However, the PFRSS for SMES are drafted in simple language and provide less guidance on how to apply the principles.