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Chapter 9

Problem I
1. Jollibee has substantially performed all material services, the refund period has
expired, and the collectibility of the note is reasonably assured. Jollibee recognizes
revenue as follows:

Cash.. 240,000
Notes receivable. 600,000
Franchise revenue.. 840,000

2. The refund period has expired and the collectibility of the note is reasonably
assured, but Jollibee has not substantially performed all material services. Jollibee
does not recognize revenue, but instead recognizes a liability as follows:

Cash.. 240,000
Notes receivable. 600,000
Unearned franchise revenue.. 840,000

Franchisor will recognize the unearned franchise fees as revenue when it has
performed all material services, the adjusting entry to record the revenue then would
be:

Unearned franchise revenue... 840,000


Franchise revenue.. 840,000

3. Jollibee has substantially performed all services and the collectibility of the note is
reasonably assured, but the refund period has not expired. Jollibee does not
recognize revenue, but instead recognizes a liability as follows:

Cash.. 240,000
Notes receivable. 600,000
Unearned franchise revenue.. 840,000

The franchisor will recognize the unearned franchise fees as revenue when the
refund period expires, the adjusting entry to record the revenue then would be:

Unearned franchise revenue... 840,000


Franchise revenue... 840,000

4. Jollibee has substantially performed all services and the refund period has expired,
but the collectibility of the note is not reasonably assured. Jollibee recognizes revenue
by the installment or cost recovery method. If we assume that Jollibee uses the
installment method, it recognizes revenue of P240,000 as follows:

Cash.. 240,000
Notes receivable. 600,000
Franchise revenue.. 240,000
Unearned franchise revenue 600,000
The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of
franchise, the entry would be as follows:
Unearned franchise revenue 120,000
Franchise revenue.. 120,000
This revenue recognition may be true only in the event there is no cost of franchise at
all. On the other hand, it may be somewhat misleading since under the installment
sales method; gross profit is earned or realized thru collections.

5. The refund period has expired, but Jollibee has not substantially performed all
services and there is no basis for estimating the collectibility of the note. Jollibee
does not recognize the note as an asset. Instead, it uses a form of the deposit
method. For example, suppose Jollibee has developed an entirely new product
whose success is uncertain and the franchisee will pay the note from the cash
flows from the sale of the product, if any. Jollibee records the initial transaction as
follows:

Cash.. 240,000
Unearned franchise revenue.. 240,000

The franchisor may recognize the unearned franchise fees as revenue under the
accrual method in the normal manner at the completion of the services to be
performed (if collectibility is reasonably assured), the adjusting entry to record the
revenue then would be:
Unearned franchise revenue... 240,000
Franchise revenue... 240,000

Alternatively, it may recognize revenue under the installment method if it has no basis
for estimating the collectibility of the note.
6. Now assume that Jollibee has earned only P360,000 from providing initial
services, with the balance being a down payment for continuing services.
If the refund period has expired and the collectibility of the note is
reasonably assured, Jollibee recognizes revenue of P360,000 as follows:
Cash.. 240,000
Notes receivable. 600,000
Franchise revenue.. 360,000
Unearned franchise revenue.. 480,000
The franchisor recognizes the unearned franchise revenue of P480,000 as revenue
when it performs the continuing services, the adjusting entry to record the revenue
then would be:
Unearned franchise revenue... 480,000
Franchise revenue... 480,000
In all these cases except the fifth, the franchisor accounts for the collection of interest
and principal on the note receivable in the usual manner. In the fifth situation, it does
not recognize the note and revenue until a future event occurs. In addition, the
franchisor accounts for its costs in the same way as its revenue recognition. That is, if
it defers revenue, then it defers the related cost of goods sold. Then, when it
recognizes revenue, it matches the cost of goods sold against the revenues. The
franchisee accounts for its payments as an intangible asset.
Sometimes the franchisor collects the initial franchise fee far in advance of performing
its services. At other times collection of part of the initial franchise fee is deferred until
the franchise is operating successfully.
Problem II
1.
Cash ......................................... 75,000
Unearned Franchise Fee ..................... 75,000
2.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 166,119
[P{75,000 + (P30,000 x 3.0373)] = P116,119
(Table IV n = 4, i = 12%)
3.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 75,000
Unearned Franchise Fee ..................... 91,119

Problem III
1. If there is a reasonable expectation that the down payment may be refunded and substantial future services remain to be performed by Pizza,
Inc., the entry should be:
Cash.. 120,000.0
0
Notes receivable.. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)...
Unearned franchise revenue (P120,000 + P383,300.16) 503,300.1
6

2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is
minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be:
Cash.. 120,000.0
0
Notes receivable. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue.. 503,300.1
6

3. If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of
services still to be performed by the franchisor in future periods, and collectibility of the note is reasonably assured, the entry should be:
Cash.. 120,000.0
0
Notes receivable. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue.. 120,000.0
0
Unearned franchise revenue 383,300.1
6

4. If the initial down payment is not refundable and no future services are required by the
franchisor, but collection of the note is so uncertain that recognition of the note as an
asset is unwarranted, the entry should be:

Cash.. 120,000.
00
Franchise revenue.. 120,000.0
0

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.

5. If the initial down payment is refundable or substantial services are yet to be performed, but collection of the note is so uncertain that
recognition of the note as an asset is unwarranted, the entry should be:
Cash.. 120,000
Unearned franchise revenue.. 120,000

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.

Problem IV
1. If the down payment is refundable, and no services have been rendered at the time the
arrangement is made, and collection on the note is reasonably certain, the entry should
be:

Cash.. 120,000.
00
Notes receivable. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Unearned franchise revenue.. 262,645.5
0

2. Initial services are determined to be substantially performed, the refund period has
expired and the collection of the note is reasonably assured, the full accrual method
would be used. Assume that substantial performance of the initial services costs
P52,529.1 the entry should be:

Cash.. 120,000.
00
Notes receivable. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Franchise revenue.. 262,645.5
0

Cost of franchise revenue 52,529.1


0
Cash, etc 52,529.10

Few months after, the collectibility of the note becomes doubtful or no reasonable
assurance, the installment sales method could be used as a general rule. In addition to
the entries above, following entries would be required:

a. To set-up cost of franchise:


No entry required, already set-up previously.

b. To defer gross profit on franchise:


Franchise revenue 262,645.
50
Cost of franchise revenue 52,529.10
Deferred gross profit on franchise 210,116.4
0
c. Adjustments to recognize gross profit on franchise:
Deferred gross profit on franchise 96,000.0
0
Realized gross profit on franchise 96,000.00

Franchise revenue.. 262,645.5


Less: Cost of franchise revenue 52,529.1
Gross profit.. 210,116.4
Gross profit rate (210,116.4/262,645.5) 80%

Collections as to principal. P120,000.


00
Multiplied by: Gross profit rate. 80
%
Realized gross profit on franchise.. P
96,000.00
Problem V
If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and
the permits on February 1, 20x5, and operations commence at that time, the following
journal entries would be appropriate:

July 1, 20x3:
Cash.. 120,000
Notes receivable. 480,000
Unearned franchise revenue.. 600,000

Deferral of revenue recognition is required when substantial performance" of franchisor


services has not been completed. It would call for deferral of revenue recognition until
evidence of service performance was available. The best evidence, of course, would be
the commencement of operations of the franchise outlet and at this point in time,
revenue is recognized.

During 20x3:
Deferred cost of franchise revenue. 360,000
Cash.... 360,000

December 31, 20x3:


Interest receivable (P480,000 x 14% x 6/12).. 33,600
Cash.... 33,600

February 1, 20x4:
Unearned franchise revenue.. 600,000
Franchise revenue.. 600,000

Cost of franchise revenue.. 360,000


Deferred cost of franchise revenue.. 360,000

Problem VI

No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash.. 1,500,000 1,500,000
Notes receivable. 4,500,000 4,500,000
Unearned franchise revenue. 6,000,000 6,000,000
Receipt of initial franchise fee.
Conditions to be met: Cash Notes Cash Notes
Services No No No No
Period of refund Yes Yes Yes Yes
Reasonably No
assured reasonable
Collectibility assurance
1/1/20x4 Balance 1,500,000 4,500,000 1,500,000 4,500,000
Status Liability Liability Liability Liability

December 31, 20x4


Cash.. 1,575,000 1,575,000
Notes receivable. 1,125,000 1,125,500
Interest income (P3,750,000 x 10%) 450,000 450,000
Annual collection.
Deferred cost of franchise 1,800,000 1,800,000
Cash 1,800,000 1,800,000
To defer cost of franchise since substantial
services had not been performed.

Operating expenses 120,000 120,000


Cash 120,000 120,000
To record expenses.

Adjustments:
Cost of franchise 1,800,000
Deferred cost of franchise 1,800,000
To recognize cost of franchise.

Unearned franchise revenue. 6,000,000


Franchise revenue 6,000,000
To recognize franchise revenue based on
the
following analysis:

Conditions to be met: Cash Notes

Services Yes Yes

Period of refund Yes Yes


Reasonably
Collectibility assured

1/1/20x4 Balance.. 1,500,000 4,500,000


12/31/20x4: Collection as to 1,125,0 (1,125,000
principal 00 )

12/31/20x4 Balance 2,625,000 2,625,000

Status Revenue Revenue

Adjustments (Installment sales


method)
a. To set-up cost of franchise:
No entry*

b. To set-up deferred gross profit


Unearned franchise revenue 6,000,000
Deferred cost of franchise
revenue 1,800,000
Deferred gross profit 4,200,000
*There are different options on this matter, an entry may be made to set-up cost of franchise and
eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to
set-up deferred gross profit. Refer to Illustration 9-6 for alternative treatment to set-up cost of franchise.
Conditions to be met: Cash Notes
Services Yes Yes
Period of refund Yes Yes
No
reasonabe
Collectibility assurance
1/1/20x4 Balance.. 1,500,000 4,500,000
1,125,00 (1,125,000
12/31/20x4: Collection as to principal 0 )
12/31/20x4 Balance 2,625,000 2,625,000
Revenue
Status I/S Liability
Method

c. To recognize realized gross profit on


franchise:
Deferred gross profit 1,837,500
Realized gross profit on franchise 1,837,500
Collections principal x gross profit rate
P2,625,000 x (6,000 1,800)/6,000 = P1,837,500

2.
No reasonable
Reasonably Assured assurance
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)* P6,000,000 P 0
Less: Cost of franchise (accrual 1,800,00
method)* 0 0
Gross profit on regular franchise
(accrual)* P4,200,000 P 0
Add: Gross profit on franchise
(installment -0
sales method) - *1,837,500
Gross profit on franchise P4,200,000 P1,837,500
Less: Operating expenses 120,000 120,000
P4,080,000 P1,717,500
Add: Interest income.. 450,000 450,000
Net income. P4,530,000 P2,167,500

Problem VII
1.
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash.. 1,440,000 1,440,000
Notes receivable. 3,840,000 3,840,000
Unearned interest income* 796,896 796,896
Unearned franchise revenue. 4,483,104 4,483,104
Receipt of initial franchise fee.

Conditions to be met: Cash Notes (PV) Cash Notes (PV)


Services** No No No No
Period of refund until date of
Opening No No No No
Reasonably No
assured reasonable
Collectibility assurance
3,043,104* 3,043,104*
1/1/20x4 Balance 1,440,000 ** 1,440,000 **
Status Liability Liability Liability Liability
*Unearned interest income or discount on notes receivable: P3,840,000 P3,043,104 = P796,896.
* *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred
and subsequent direct cost of franchise should also be deferred.
***P960,000 x 3.1699 = P2,535,920

February 2, 20x4:
144,931.2 144,931.2
Deferred cost of franchise 0 0
Cash 144,931.20 144,931.20
To defer cost of franchise since substantial
services had not been performed.

June 13, 20x4:


General expenses 60,000 60,000
Cash 60,000 60,000
To record expenses.

August 8, 20x4:
Deferred cost of franchise 360,000 360,000
Cash 360,000 360,000
To defer cost of franchise since substantial
services had not been performed.

November 2, 20x4:
Deferred cost of franchise 840,000 840,000
Cash 840,000 840,000
To defer cost of franchise since substantial
services had not been performed.

November 2, 20x4:
Substantial completion of services.

December 31, 20x4:


Cash.. 960,000 960,000
Notes receivable 960,000 960,000
Annual collections.

Adjustments:
304,310.
Unearned interest income 304,310.40 40
304,310.4
Interest income 304,310.40 0
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.

1,344,931.
Cost of franchise 20
1,344,931.2
Deferred cost of franchise 0
To recognize cost of franchise.

Unearned franchise revenue. 4,438,1040


Franchise revenue 4,438,1040
To recognize franchise revenue based on
the
following analysis:

Conditions to be met: Cash Notes (PV)

Services** Yes Yes


Period of refund outlet already
opened. Yes Yes
Reasonably
Collectibility assured
4,438,104
1/1/20x4 Balance 1,440,000

12/31/20x4:
Collection..... .
P960,000
Less: Interest collection ( 655,689.60
304,310.40 )
Collection 655,689.6
Principal.P655,689.60 0

2,095,689. 2,387,414.4
60 0

Status Revenue Revenue

Adjustments (Installment sales


method)
a. To set-up cost of franchise:
1,344,931.
Cost of franchise revenue.. 20
Deferred cost of franchise 1,344,931.
revenue 20

b. To set-up deferred gross profit:


Unearned franchise revenue 3,483,104
1,344,931.
Cost of franchise revenue 20
2,138,172.
Deferred gross profit 80
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will
be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit.
Refer to Illustration 9-5 for alternative treatment to set-up cost of franchise.

Conditions to be met: Cash Notes (PV)


Services** Yes Yes
Period of refund outlet already
opened. Yes Yes
No
reasonable
Collectibility assurance
1/1/20x4 Balance 1,440,000 304,104
12/31/20x4:

Collection..... . P960,000
Less: Interest collection 304,310.40 655,689.6 ( 655,689.60
Collection Principal.P655,689.60 0 )
2,095,689.6 2,387,414.4
0
Status Revenue Liability
I/S Method

c. To recognize realized gross profit on


franchise:
Deferred gross profit 1,466,983.20
1,466,983.
Realized gross profit on franchise 20
Collections principal x gross profit rate
P2,095,689.60 x (4,483,104 1,344,931.20)/4,483,104 = P1,466,983.20
2.
No reasonable
Reasonably Assured assurance
Income Statement, 12/31/20x4:
P
Franchise revenue (accrual method)* 4,471,1040 P 0
Less: Cost of franchise (accrual 1,344,931.2
method)* 0 0
Gross profit on regular franchise
(accrual)* P3,138,172.8 P 0
Add: Gross profit on franchise
(installment *1,466,983.2
sales method) -0- 0
P1,466,983.2
Gross profit on franchise P3,138,172.8 0
Less: Operating expenses 60,000 60,000
P1,406,983.2
P3,078,172.8 0
304,310.4
Add: Interest income.. 304,310.40 0
P3,382,483.2 P1,771,293.
Net income. 0 60

*Note: This item represents regular franchise sales-type transaction. If the collectibility of
the fee (note receivable) is reasonably assured, the permissible method to be applied should
be the accrual method. It should be observed that in the event, there is cost of franchise
and the installment sales method is used, the concept of revenue recognition does literally
apply to franchise revenue but to the recognition of realized gross profit on franchise thru
collections as to principal multiplied by gross profit rate.

Alternatively, computation of interest and principal collections are as follows:


Interest (10%
Date Collection of Principal Unpaid
Unpaid Balance
Balance)
1/03/20x4 4,483,104
1/03/20x4 1,440,000 -0- 1,440,000 3,043,104
12/31/20x4 960,000 304,310.40 655,689.60 2,387,414.40
Total 2,400,000 304,310.40 2,095,689.60

Problem VIII
1. The fee is earned for providing continuing services:
Cash or Accounts receivable 108,000
Franchise revenue continuing franchise fee 108,000

2. If P10,000 of the fee is for national advertising:


Cash or Accounts receivable 108,000
Franchise revenue continuing franchise fee 96,000
Unearned franchise revenue continuing franchise fee 12,000

The franchisor recognizes the unearned franchise fees as revenue when it performs the
advertising services and also records the costs as expenses, the entries should be:

Advertising expenses xxx


Cash, etc.. xxx

Unearned franchise revenue continuing franchise fee 12,000


Franchise revenue continuing franchise fee 12,000

Problem IX PFRS 15
Correction: Additional data:
The franchisor should:
Identify the performance obligations and the point in time when the performance obligations
are satisfied and revenue is recognized.
Consider the following for allocation of the transaction price at December 31, 20x7.

Rights to the trade name, market area, technical and proprietary know- P
how. 570,000.00
Services training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,774.50
.......
Machinery and equipments, etc. (costing, __399,000.0
P285,000). . . . . . . . . . . . . . . . . . . . . . . 0
Total transaction P1,252.774.
price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
The entries for the above transactions are as follows:

December 31, 20x7


Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,000.
....... 00
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855,000.
..... 00
Unearned interest income (or Discount on notes *172,225.
receivable) . . 50
Unearned franchise 570,000,0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Unearned service revenue training, etc. . . . . . . . . . . . . . . . 283,774.5
.... 0
Unearned sales revenue machinery and equipments, etc. . 399,000.0
.. 0
*discrepancy of P22.80.
February 28, 20x8
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,000.
..... 00
Franchise 570,000.0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Unearned service revenue training, 283,774.
etc. . . . . . . . . . . . . . . . . . . . . . 50
Service revenue training, etc. 283,774.5
0
Unearned sales revenue machinery and equipment, etc.. . . . . 399,000.
.. 00
Sales 399,000.0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Cost of goods 285,000.
sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000.0
...... 0

Problem X
March 20:
Cash 5,000
Notes receivable 20,000
Unearned franchise fee 25,000

June 15:
Unearned franchise revenue 25,000
Franchise revenue 25,000

July 15:
Cash 500
Service revenue 500

Problem XI
Cash or Accounts receivable 117,600
Franchise revenue supplies sales.. 117,600

Cost of franchise supplies sales 90,000


Supplies inventory. 90,000

Problem XII
Cash. 21,600
Notes receivable (P108,000 P21,600) 86,400
Unearned interest income (P86,400 P69,978) 16,422
Franchise revenue (P21,600 + 69,978 P4,800*) 86,778
Unearned franchise revenue equipment sale* 4,800
All the criteria to recognize initial franchise fee as revenue was met, except that an amount
of P4,800 equivalent to indicated profit (P24,000, selling price less P19,200 option price) will
be deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows:
Cash or Accounts receivable 19,200
Unearned franchise revenue equipment sale 4,800
Franchise revenue equipment sale.. 24,000
Cost of franchise - equipment sale. 19,200
Equipment inventory. 19,200

Problem XIII
April 1, 20x4:
Cash. 288,000
Notes receivable 192,000
Franchise revenue (P21,600 + P86,400 P4,800*) 480,000

December 31, 20x4:


Franchise revenue initial franchise fee 480,000
Interest income (P192,000 x 8% x 9/12) 11,520
Cash (P153,600 P11,520). 142,080
Notes receivable 192,000
Gain or revenue from repossessed franchise 134,400
Problem XIV
Cash 72,000
Notes receivable 360,000
Deferred franchise purchase option liability. 432,000

Deferred cost of franchise revenue/Investment in Franchisee xxx


Cash, etc xxx

Deferred franchise purchase option liability. 432,000


Deferred cost of franchise revenue/Investment in Franchisee xxx
Gain on option to exercise to purchase the franchise outlet 432,000

Multiple Choice Problems


1. a following conditions should be observed to recognize revenue:
Services none
Period of Refund expired
Collectibility of the note reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

2. d following conditions should be observed to recognize revenue:


Services Performed yes
Period of Refund not expired / still refundable
Collectibility of the note reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

3. a - following conditions should be observed to recognize revenue:


Services Performed none
Period of Refund expired
Collectibility of the note very uncertain or extremely uncertain.

There was failure on one condition; therefore, no revenue should be recognized. Since,
the collectibility of the note is extremely uncertain recognition of the note as an asset in
unwarranted (or should not be recorded).

4. d the problem already indicated that P300,000 is earned, therefore the remaining
balance of P400,000 (P700,000 P300,000 is considered as unearned revenue.

5. a
Cash 6,000
Notes receivable 30,000
Unearned franchise fee 36,000

6. b
Unearned franchise fee 36,000
Franchise fee revenue 36,000

7. a
Cash 6,000
Notes receivable 30,000
Franchise fee revenue 36,000

8. d the franchise fee revenue should be zero, since no substantial performance of


services had been performed (and the down payment is still refundable).
9. b
In this problem, since there is doubtful of collection, it is safely assumed to used
installment method. Therefore, the realized gross profit would be:
Collections in 20x4..P 200,000
x: Gross profit rate [100% - (P150,000/P500,000)]. 70%
Realized gross profit in 20x4. P 140,000
Revenue Analysis:
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
Collectibility No Reas.
Assured
200,000 300,000
Status Rev I/S Method Liability
10. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee:
Cash Notes Receivable
Services Yes Yes
Period of Refund Yes Yes
Collectibility Reasonably Assured
P20,000 P80,000
Status Revenue Revenue

Substantial performance of services has been rendered because commencement of


operations by the franchisee shall be presumed to be the earliest point of which
substantial performance has occurred, unless it can be demonstrated that substantial
performance of all obligations, including services rendered voluntarily, has occurred
before that time.

Period of refunding the initial franchise fee and collectibility of the notes is not anymore
a problem (they depend on the profitability of its first year of operations) because the
result of operations in the first year is profitable.
Therefore, the initial franchise fee of P100,000 (P20,000 + P P80,000) is considered as
revenue, and a continuing franchise fee of P5,000 (1% x P500,000) should be also be
recognized as revenue continuing fanchise.

Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus
P5,000 continuing).

11. a
Initial franchisee revenue (since all services had been performed
and assumed that period of refunding already expired).. P100,000
Add: Continuing franchise revenue (5% x P800,000)
40,000
Total Revenue from franchise. P 140,000

12. d
There is already substantial performance of services rendered since, the franchise
outlet started operations and it is assumed that period of refund has expired.

The continuing franchise fee is recognized also as revenue since it is earned at the time
it was received.

The net income would be:


Franchise Revenue:
Initial Franchise Fee:
Down payment P 30,000
PV of installment (P10,000 x 1.7355). 17,355
P47,355
Continuing Franchise Fee (5% x P500,000) 25,000
Total Franchise Revenue P72,355
Add: Interest Income (10% x P17,355)
1,735
Total Revenue/Net Income P74,090

13. a

All conditions that initial franchise fee be recognized as revenue had been met as
follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
200,000 300,000
Status Revenue Revenue

The Net Income then would be as follows:


Franchise Revenue..P 500,000
Less: Cost of Franchise 150,000
Net IncomeP 350,000

14. d
In this problem, full accrual method is used to recognized the initial franchise fee of
P100,000 analyze as follows:

Revenue Analysis for IFF


Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
20,000 80,000
Status Revenue Revenue
Note: Period of refunding the initial franchise fee was presumed to have been expired
since the business operates profitably in its first year of operation.
Continuing Franchise Fee: Considered revenue the moment continuing services had
been rendered amounted to P5,000 (1% x P500,000).
Initial Franchise FeeP 100,000
Continuing franchise fee. 5,000
Total P 105,000
Less: Indirect cost of franchise 15,000
Net incomeP 90,000
15. d
Revenue = P400,000
Interest income = P160,000 8% 9/12 = P9,600
Cash = P128,000 P9,600 = P118,400
Repossession revenue: P240,000 P128,000 = P112,000.
16. c
Cash = P560,000 + P48,000 = P608,000
Franchise Fee Revenue = P560,000
Unearned Franchise Fees = P48,000 20% = P9,600
Revenue from Continuing Franchise Fees = P48,000 P9,600 = P38,400.
17. b - P200,000 + P545,872 P24,000 = P721,872.
18. b
Franchisee frequently purchases all of the equipment, products, and supplies from the
franchisor. The franchisor would account for these sales as if, it would be a product sales.
Sometimes, however, the franchise agreement grants the franchisee the right to make bargain
purchases of equipment or supplies after the initial franchise fee is paid. If the bargain price
is lower that the normal selling price of the same product or it does not provide the franchisor
the reasonable profit, then, a portion of the initial franchise fee should be deferred. The
deferred portion would be accounted for as adjustment of the selling price when the franchisee
subsequently purchases the equipment or supplies. Therefore, the amount of revenue would
be P90,234 computed as follows:
Cash Notes Receivable
Services Yes Yes
Period of Refund Yes Yes
Collectibility Reasonably Assured
P25,000 P68,234
Status Revenue Revenue except P3,000
reasonable profit on sale
of equipment
The revenue from franchise would be:
Cash P 25,000
PV of Note..P68,234
Less: Reasonable profit on sale of
Equipment P15,000 P12,000). 3,000 65,234
P 90,234
Incidentally, the entries would be:
Upon receipt of IFF:
Cash 25,000
Notes Receivable 90,000
Unearned Interest Income (P90,000 P68,234). 21,766
Franchise Revenue. 90,234
Unearned Franchise Revenue. 3,000

If equipment was sold:


Cash or Accounts Receivable 12,000
Unearned Franchise Revenue 3,000
Franchise Revenue Equipment 15,000

Cost of Sales equipment 12,000


Equipment Inventory.. 12,000
19. d
Total fee P800,000
Discount P 640,000
(507,200) (132,800)
Bargain purchase (10,000)
Advertising (P1,000 60) (60,000)
P 597,200

Cash....................................................................................... 160,000
Notes Receivable.................................................................... 640,000
Discount on Notes Receivable /Unearned Int. Income 132,800
Revenue from Franchise Fees ..................................... 597,200
Unearned Franchise Fees ............................................ 70,000

Or alternatively,
Cash....................................................................................... 160,000
Notes Receivable (at present value or net). . .. 507,200
Revenue from Franchise Fees ..................................... 597,200
Unearned Franchise Fees ............................................ 70,000

20 and 21. No requirement

22. c refer to No. 19

23. c refer to No. 19

24. b
Cash Notes Receivable
Services No No
Period of Refund No No
Collectibility Reasonably Assured
P25,000 PV - P39,623
FV P50,000
UII/Disct. P10,377
Status Liability Liability

25. d

26. d
Franchisee A:
The circumstances imply that full accrual method could be used.
Franchise Revenue....P 17,890*
Less: Franchise Cost.. 7,000
Gross ProfitP 10,890
Add: Interest Income (P10,890 x 4%). 436
Net Income..P 11,326
*Initial deposit.P 7,000
Add: PV of four payments (P3,000 x 3.6299) 10,890
P17,890

27. b refer to No. 26

28. a strictly speaking, the franchise revenue means only arising from the franchise itself
meaning coming from the franchise fee. In certain cases, the franchise revenue may
construe to be all income arising from franchise transaction including interest.
Franchisee B:
Because of the doubtful of collection and only partial completion, the deposit method
(unearned franchise revenue) should be used. No revenue or income would be
recognized in 20x4 from the franchise fee. However, because the first payment of
P3,000 was made, interest income of P436 would be recognized.

29. No answer available it should be P436 the interest income (P10,890 x 4%). Refer to
No. 28 for discussion.
30. a strictly speaking, the franchise revenue means only arising from the franchise itself
meaning coming from the franchise fee. In certain cases, the term franchise revenue
may construe to be all income arising from franchise transaction including interest.
Franchisee C:
Because of the doubtful collection but substantial completion, either the installment
sales or cost recovery method could be used. If the installment sales method is
used, gross profit of P4,218* would be recognized in 20x4 plus interest income of
P436.
* Franchise RevenueP 17,890
Less: Franchise Cost 10,000
Gross Profit....P 7,890
Gross profit percentage: P7,890 / P17,890.. 44.10%
Collections in 2007:
Initial Deposit P 7,000
Collections Principal:
First Installment.. P 3,000
Less: Interest.. 436 2,564
Collections Principal P 9,564
Multiplied by: Gross profit percentage. 44.10%
Recognized Gross Profit 2001 P 4,218
Add: Interest Income.. 436
Net Income.P 4,654
If the cost recovery method is used, no revenue or income would be recognized,
because the P10,000 collections are exactly offset by the P10,000 costs.

31. c refer to No. 30 for computation.

32. d - 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
(November 1, 20x7), therefore, the P40,000 is unearned franchise revenue
while training (as service) and equipment (sales of equipment) are separately
classified but not as an unearned franchise revenue (in contrast to PAS 18)

33. a -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
(August 1, 20x8), therefore, the P11,500 is unearned service revenue (note:
not as a unearned franchise revenue in contrast to PAS 18)

THEORIES
1 True 6. True
.
2 False 7. True
.
3 False 8. True
.
4 False 9. a
.
5 True
.