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2 Exercises Franchising
1. On December 31, 2011, Coffee Blends, Inc. signed an agreement authorizing Ms. De Jesus to
operate as a franchisee for an initial franchise fee of P500,000. Of this amount, P200,000 was
received upon signing of the agreement and the balance is due in three annual payments of
P100,000 each beginning December 31, 2012. The agreement provides that the down
payment (representing a fair measure of the substantial initial services rendered by Coffee
Blends) is not refundable although some future services (insignificant) are yet to be
performed. Ms. De Jesus credit rating is such that the collection of the note is reasonably
assured. The present value at December 31, 2011 of the three payments discounted at 14% is
P232,200. What is the amount of unearned franchise fee to be recorded by Coffee Blends, Inc.
on December 31, 2011?
2. On January 2, 2011, JJG Company signed an agreement to operate as a franchisee of Figaro,
Inc. for an initial franchise fee of P3,125,000 for 10 years. Of this amount, 40% was paid when
the agreement was signed and the balance payable in four semi-annual payments beginning
June 30, 2011. JJG Company signed a non-interest bearing note for the balance. JJGs credit
rating indicates that it can borrow money at 24% on the loan of this type. Substantial services
costing P802,500 have been rendered by Figaro, Inc. The present value of an annuity of P1 at
12% for 4 periods is 3.04. If the collection of the note is not reasonably assured, the realized
gross profit for the year ended December 31, 2011 is how much?
3. On December 31, 2011, Crispy Cream, Inc. authorized J. Guerrero to operate as a franchisee
for an initial franchisee fee of P1,500,000. Of this amount, P600,000 was received upon signing
the agreement and the balance, represented by a note, is due in three annual payments,
appropriately discounted is P720,000. According to the agreement, the non-refundable down
payment represents a fair measure of the services already performed by Crispy Cream
however, substantial future services are required of Crispy Cream. Collectability of the note is
reasonably certain. On December 31, 2011, what entry should Crispy Cream record for the
receipt of the initial franchise fee?
4. On January 2, 2011, Gino Services, Inc. signed an agreement authorizing Triple 8 Company to
operate as a franchise over a 20-year period for an initial franchise fee of P50,000 received
when the agreement was signed. Triple 8 commenced operations on July 1, 2011, at which
date all of the initial services required of Gino had been performed. The agreement also
provides that Triple 8 must pay annually to Gino a continuing franchise fee equal to 5% of their
gross sales. Triple 8 reported gross sales of P400,000 for 2011. For the year ended December
31, 2011, how much should Gino Services, Inc. record as revenue from franchise fees with
respect to the Triple 8 franchise?
5. On July 1, 2011, Hot Company signed an agreement to operate as a Franchise of Dryers Ice
Cream Company for an initial franchise fee of P10,000,000. On the same date, Hot Company
paid P6,000,000 and agreed to pay the balance evidenced by a non-interest bearing note in
four annual payments of P1,000,000, beginning July 1, 2012. The collectability of the note is
not reasonably assured. Hot Company can borrow at 14% for a loan of this type. The present
value of an annuity of 1 at 14% for 4 periods is 2.91. Dreyers Company rendered initial services
so that Hot Company can start their operations. The total costs of such services is P2,000,000.
The franchisor also incurred indirect costs of P50,000. The franchise agreement further

requires the franchisee to pay continuing franchise fee at 5% of its monthly gross sales. The
total sales reported by Hot Company up to December 31, 2011 is P5,000,000. Assuming the
use of the instalment method of revenue recognition, what is the net income of Dreyers Ice
Cream Company for the year ended December 31, 2011?