Franchise .doc

Franchise fees are properly recognized as revenue when received in cash. when a contractual agreement has been signed. after the franchise business has begun operations. after the franchiser has substantially performed its service.

Some of the initial franchise fee may be allocated to continuing franchise fees. interest revenue on the future installments. options to purchase the franchisee's business. all of these may reduce the amount of the initial franchise fee that is recognized as revenue.

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 increase revenue recognized from the initial franchise fee by the amount of the expected future purchases. 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. defer recognition of any revenue from the initial franchise fee until the bargain purchases are made. None of these.

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised. record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised. record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee. None of these.

Continuing franchise fees should be recorded by the franchisor as revenue when earned and receivable from the franchisee. as revenue when received. in accordance with the accounting procedures specified in the franchise agreement. as revenue only after the balance of the initial franchise fee has been collected.

On January 1, 2017 Dairy Delight, Inc. entered into a franchise agreement with a company allowing the company to do business under Dairy Delight's name. Dairy Delight had performed substantially all required services by January 1, 2017, and the franchisee paid the initial franchise fee of P105,000 in full on that date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of $9,000 annually, of which 20% must be spent on advertising by Dairy Delight. What entry should Dairy Delight make on January 1, 2017 to record receipt of the initial franchise fee and the continuing franchise fee for 2017? a.

Cash

114,000 Franchise Fee Revenue

105,000

Revenue from Continuing Franchise Fees b.

Cash

9,000 114,000

Unearned Franchise Fees c.

Cash

`

114,000 114,000

Franchise Fee Revenue

105,000

Revenue from Continuing Franchise Fees

7,200

Unearned Franchise Fees d.

Prepaid Advertising Cash

1,800 1,800 114,000

Franchise Fee Revenue

105,000

Revenue from Continuing Franchise Fees

9,000

Unearned Franchise Fees

1,800

On April 30, 2017, Date and Dine entered into a franchise agreement with Food Trip Inc. to sell their products. The agreement provides for an initial franchise fee of P1,200,000 which is payable as follows: P400,000 cash to be paid upon signing the contract, and the balance in five equal annual installments every December 1, starting in 2017. Date and Dine signs a non-interest bearing note for the balance. The credit rating of the franchisee indicates that the money can be borrowed at 10%. Round PV factor to two decimal places.

The agreement further provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales. Food Trip Inc. incurred direct cost of P540,000, of which P170,000 is related to continuing services and indirect costs of P72,000, of which 18,000 is related to continuing services. The franchisee started business operations on September 2, 2017 and was able to generate sales of P950,000 for 2017. The first installment payment was made in due date.

Assuming that the collectability of the note is not reasonably assured, how much is the net income of the franchisor for the fiscal year ended December 1, 2017? P252,206 P174,508 P172,650 P254,935

Solution:

Cash

400,000

NR PV (160,000x3.79)

_606,400

Total Revenue

1,006,400

Direct cost (540,000-170,000)

(370,000)

Gross Profit

636,400

Gross Profit %

63.24%

Cash

400,000

NR principal payment (160,000 – 10%(606,400)(7/12) 124,627 Total collection

524,627

Gross Profit Rate

63.24%

Realized Gross Profit

331,774

Realized Gross Profit

331,774

Interest income (10%(606,400)(7/12))

35,373

Continuing franchise fee (950,000 x 5%)

47,500

Total revenue

414,647

Direct cost of continuing services

(170,000)

Indirect cost

(72,000)

Net income

172,647

Spiral Restaurant sold a fine dining restaurant franchise to Circles Hotel. The sale agreement signed on January 1, 2017 called for a P875,000 down payment plus three P437,500 annual payments (covered by a non-interest bearing note) representing the value of initial franchise services rendered by Spiral restaurant. In addition, the agreement required the franchisee to pay 6% of its gross sales to the franchisor. The restaurant operated in July and its sales for the year amounted to P6,562,500. Assuming a 15% interest rate is appropriate, round PV factor to two decimal places.

How much is the franchisor’s total revenue for the year ended 2017 income statement? P2,266,250 P2,415,875 P2,022,125 P2,403,405

On August 1, 2017, Holiday Inc. entered into a franchise agreement with intense franchisee. The initial franchise fees agreed upon is P246,900, of which P46,900 is payable upon signing and the balance to be covered by a non-interest bearing note payable in four equal annual installments. The down payment is refundable within 75 days. Intense Inc. has a high credit rating, thus, collection of the note is reasonably assured. Out-of-pocket costs of P125,331 and P12,345 were incurred for direct expenses and indirect expenses respectively. Prevailing market rate is 9%. Round PV factor to four decimal places.

On the fiscal year ended September 30, 2017, how much revenue from franchise fee will the franchisor recognize?

P208,885 P246,900 P0 P83,554

On December 1, 2017, Zach, Inc. authorized Movers Company to operate as a franchisee for an initial franchise fee of P600,000. Of this amount, P240,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of P120,000 each beginning December 31, 2018. The present value on December 1, 2017, for three annual payments appropriately discounted is P288,000. According to the agreement, the non-refundable down payment represents a fair measure of the services already performed by Zach and substantial future services are still to be rendered. Collectability of the note is reasonably certain.

On December 31, 2017 Statement of Financial Position how much should Zach report as unearned franchise fee from Movers Company? P528,000 P360,000 P400,000 P288,000

On December 31, 2017, Mcqueen, Inc. authorized Mr. Chun to operate as a franchisee for an initial franchise fee of P150,000. Of this amount, P60,000 was received upon signing the agreement and the balance represented by a note due in three annual payments of P30,000 each beginning December 31, 2018. The present value on December 31, 2017, for three annual payments appropriately discounted is P72,000. According to the agreement, the non- refundable down payment represents a fair measure of the services already performed by Mcqueen and substantial future services are still to be rendered. However, the collectibility of the note is not reasonably assured. Mcqueen’s December 31, 2017, balance sheet unearned franchise fee from Mr. Chun’s franchise should report as: P132,000 P100,000 P0 P72,000

Wynne Inc. charges an initial franchise fee of P1,380,000, with P300,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is P818,808. The franchisee has the option to purchase P180,000 of equipment

for $144,000. Wynne has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is P300,000. P1,082,808. P1,118,808. P1,380,000.

Yount Inc. charges an initial franchise fee of P920,000, with P200,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is P545,872. The franchisee has the option to purchase P120,000 of equipment for P96,000. Yount has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is P200,000. P721,872. P745,872. P920,000.

On January 2, 2017, ABC Corp. entered into a franchise agreement with XYZ Corp. to sell their products. The agreement provides for an initial franchise fee of P2,812,500, P787,500 of which is payable upon signing the contract and the balance in five equal annual installments payable every December 31 and starting on December 31, 2017. ABC signs a 15% interest bearing note for the balance. The agreement further provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales. On October 30, 2017, the franchisor completed the initial services required in the contract at a cost of P900,000 and incurred indirect costs of P180,000. The franchise commenced business operations on November 3, 2017. The gross sales reported to the franchisor are P92,250 for November and P106,875 for December. The first installment payment was made on due date. Assume that the collection of the note is not reasonably assured.

In ABC’s income statement for the year ended December 31, 2017, how much is the income from franchise operations?

P972,855.00 P640,856.25 P847,406.25 P944,606.25

On January 1, 2017, Best Foods Corporation granted a franchise to Mr. X to operate a sales outlet. The franchisor is to provide initial and continuing services for an initial and continuing services for an initial fee of P200,000 and an annual fee of 5% based on gross sales. The franchisee pays 25% of the required initial fee upon signing of the contract and undertakes to pay 50% upon substantial performance of the initial services by the franchisor and the balance, one year after. The franchisor is able to provide substantially all of the initial services as of March 10, 2017 at a total cost of P120,000. During the year, franchisee’s sales amount to P3,000,000. How much revenue is recognized by the franchisor upon signing of the contract? P200,000 P100,000 P50,000 P300,000 P-0-

Using the same data as the previous number, how much franchise fee revenue must appear on the books of the franchisor for 2017? P200,000 P350,000 P300,000 P400,000

On December 31, 2017, Rice, Inc. authorized Graf to operate as a franchise for an initial franchise fee of P150,000. Of this amount, P60,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of P30,000 each beginning December 31, 2017. The present value on December 31, 2017 of the three annual payments appropriately discounted is P72,000. According to the agreement, the non-refundable down payment represents a fair measure of the services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonably certain. In Rice’s December 31, 2017 balance sheet, unearned franchise fees from Graf’s franchise should be reported as P132,000 P100,000 P90,000 P72,000

Each of Potter Pie Co.’s twenty-one new franchisees contracted to pay an initial franchise fee of P30,000. By December 31, 2017, each franchisee had paid a non-refundable P10,000 fee and signed a note to pay P10,000 principal plus the market rate of interest on December 31, 2017 and December 31, 2018. Experience indicates that once franchisee will default on the additional payments. Services for the initial fee will be performed in 2018. What amount of net unearned franchise revenue would Potter report at December 31, 2017? P400,000 P600,000 P610,000 P630,000

Corny Island Inc. sells franchises for ice cream outlets in Metro Manila. One contract has been signed on January 15,2016. The agreement calls for an initial franchise fee of P6,000,000 to be paid by the franchise upon signing of the contract. The franchisor initial cost of services is P2,250,000 to be incurred uniformly over the 6 month period / prior to the scheduled opening date of July 15, 2017. No return payments are to be made by the franchisor, although there will be continuing costs of P180,000 per year for services rendered during the 10 year term of contract. The normal return for the franchisor on continuing operation involving franchise outlets is 10%. How much net income would be recognized by the franchisor on July 15, 2017? P3,750,000 P6,000,000 P5,750,000 P1,750,000

*Note that the P180,000 is cost not continuing franchise fee. There’s no continuing franchise fee but there should have been in the amount of P200,000 (180,000/90%). Deferred franchise should be computed as (180,000/90%)*(10).

On December 31, 2011, Maxes Inc. signed an agreement authorizing Antoks Company to operate as a franchise for an initial franchise fee of P50,000. Of this amount, P20,000 was received upon signing of the agreement and the balance is due in three annual payment of P10,000 each, beginning December 31, 2012. No future services are required to be performed. Antoks Company’s credit rating is such that collection of the note is reasonably assured. The present value at December 31, of the three annual payments discounted at 14% (the implicit rate for a loan of this type) is P23,220. On December 31, 2011, Maxes should record earned franchise fees of: P23,220 P43,220

P30,000 P 0

On April 1, 2017 Reebles, Inc. entered into a franchise agreement with a local business-man. The franchisee paid P75,000 and gave a P50,000, 8%, 3-year note payable with interest due annually on March 31. Reebles recorded the P125,000 initial franchise fee as revenue on April 1, 2017. On December 30, 2017, the franchisee decided not to open an outlet under Reebles' name. Reebles canceled the franchisee's note and refunded P40,000, less accrued interest on the note, of the P75,000 paid on April 1. What entry should Reebles make on December 30, 2017? a.

Loss on Repossessed Franchise

40,000

Cash b.

Loss on Repossessed Franchise

40,000 37,000

Cash c.

Loss on Repossessed Franchise

37,000 87,000

Cash Note Receivable d.

Revenue from Franchise Fees Interest Income

37,000 50,000 125,000 3,000

Cash Note Receivable Revenue from Repossessed Franchise

37,000 50,000 35,000

Use the following to answer questions no. 22 to no. 24

Happy Jack's Pancake Restaurants Inc. sells franchises for an initial fee of P36,000 plus operating fees of P500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2017, Tim Cruise signed a franchise contract, paying the standard P6,000 down with the balance due over 5 years with interest.

Assuming that the initial services to be performed by Happy Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to: Franchise fee revenue for P36,000. Franchise fee revenue for P6,000. Unearned franchise fee revenue for P36,000. Unearned franchise fee revenue for P30,000.

Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2003, substantially all continuing obligations had been met. The journal entry required at October 20, 2003 would include a: Credit to franchise fee receivable for P27,000. Credit to franchise fee revenue for P9,000. Debit to unearned franchise fee revenue for P36,000. Debit to unearned franchise fee revenue for $27,000.

Assume at the time of signing the contract, collectibility of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a: Credit to franchise fee revenue for P36,000. Credit to franchise fee revenue for P9,000. Credit to unearned franchise fee revenue for P36,000. Credit to unearned franchise fee revenue for P27,000.

Slater, Inc. grants a franchise to Mr. Greenwitch for an initial franchise fee of P1,000,000. The agreement provides that Slater, Inc. has the option within the one year to acquire franchisee’s business and it seems certain that Slater, Inc. will exercise the option. On Slater, Inc. books, how should the initial franchise fee be recognized? Deferred revenue and to be amortized. Realized revenue. Extraordinary revenue. Deferred revenue and treated as a reduction from Slater’s investment when the option is exercise.