IMUS INSTITUTE

SY 2015- 2016
PRACTICAL ACCOUNTING II

SPECIAL REVENUE RECOGNITION FRANCHISE

PROBLEM 1

On April 30, 2015, 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 01, starting in 2015.
Date and Dine signs a non interest bearing note for the balance. The credit rating of the franchise indicates that
the money can be borrowed at 10%. The present value factor of an ordinary annuity at 10% for 5 periods is 3.7908.
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 P18,000 is related to continuing services. The franchisee started business
operations on September 02, 2015 and was able to generate sales of P950,000 for 2015. 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 01, 2015?
PROBLEM 2

Spiral Restaurant sold a fine dining restaurant franchise to Circles Hotel. The sale agreement signed on January 01,
2015 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 additio9n, the
agreement required the franchisee to pay 6% of its gross sales to franchisor. The restaurant opened in July and its
sales for the year amounted to P6,562,500. Assuming a 15% interest rate is appropriate. (PV of annuity of P1 at
15% for three periods is 2.28)
How much is the franchisors total revenue for the year ended 2015 income statement?
PROBLEM 3

On August 01, 2015, 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 noninterest 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%. PV factor is 3.2397

On the fiscal year ended September 30, 2015, how much revenue from franchisee fee will the franchisor
recognize?
PROBLEM 4

On December 01, 2015, Zach, Inc. authorized Movers Company to operate as a franchise 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 321, 2016. The present value on
December 01, 2015, for three annual payments appropriately discounted at 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. However, collectability the note is reasonably certain.
On December 31, 2015 Statement of Financial Position, How much should Zach report as unearned franchise fee
from Movers Company?

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