Franchise Accounting

1. On January 3, 2014, Lincoln service Inc., signed an agreement authorizing Lisa Company to
operate as a franchise over a 20-year period for an initial franchise fee of P100,000 received
when the agreement was signed. Lisa commenced operations on July 1, 2014, at which date all
of the initial services required of Lincoln had been performed. The agreement also provides that
Lisa must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually
to Lincoln. Lisa’s franchise revenue for 2014 was 800,000. For the year ended Dec. 31, 2014,
how much should Lincoln record as revenue from franchise fees in respect of the Lisa franchise?
a. 140,000
b. 90,000
c. 45,000
d. 42,500

2. SSR Restaurant Inc., sold a fast food restaurant franchise to Shar. The sale agreement, signed on
January 2, 2014, called for a P30,000 down payment plus two P10,000 annual payments,
respecting the value of initial franchise services rendered by SSR Restaurant. In addition, the
agreement required the franchise to pay 5% of its gross revenues to the franchisor; this was
deemed sufficient to cover the cost and provide a reasonable profit margin on continuing
franchise services to be performed by SSR Restaurant. The restaurant opened early in 2011, and
its sales for the year amounted to P500,000. Assuming a 10% interest rate is appropriate, SSR
Restaurant’s 2014 total revenue will be: (the present value of an annuity af P1 at 10% for 2
periods is 1.7355)
a. 30,000
b. 47,355
c. 72,355
d. 74,090

3. DJ Builders’ Enterprises, a franchisor, charges franchisees a “franchise fee” of P500,000. Of this

amount, a non-refundable P200,000 is paid upon the signing of the contract with the balance
payable in three equal instalments after each year thereafter. DJ Builder’s will assist in locating a
suitable business site, conduct a market stud, oversee the construction of facilities, and provide
initial training for employees. On Dec. 1, 2014, DJ Builder’s signed a franchise agreement for the
U-belt area. By the end of 2014, it was determined that the subatantial performance of the
initial services had cost DJ Builder’s a total of P150,000 and that collection of the balance of the
franchise fee has been reasonably assured. In its 2014 income statement, DJ Builder’s should
report franchise revenue and net income:
Franchise Revenue Net income
a. 500,000 350,000
b. 500,000 500,000
c. 0 0
d. 350,000 350,000
4. Pista Hut granted a franchise to Eat-N-Run for the rainbowbelt area. Eat-N-Run was to pay a
franchise fee of P100,000 payable in five equal instalments starting with the payment upon
singing of the agreement. The franchise was to pay monthly 1% of gross sales of the preceding
month. Should the operation of the outlet prove to be unprofitable, the franchise may be
cancelled with whatever obligation owing to Pista Hut, in connection with the P100,000
franchise fee, waived. The first year’s operation gen erated a gross sales of P500,000, which is
considered to be a profitable operations. Indirect cost of franchise amounted to P15,000. For
the first year, Pista Hut’s net income (loss) amounted to:
a. (10,000)
b. 5,000
c. 10,000
d. 90.000

5. On April 1, 2014 Weston, Inc. entered into a franchise agreement with a local business-man. The
franchisee paid P240,000 and gave a P160,000, 8%, 3-year note payable with interest due
annually on March 31. Weston recorded the P400,000 initial franchise fee as revenue on April 1,
2014. On December 30, 2014, the franchisee decided not to open an outlet under Weston’s
name. Weston canceled the franchisee’s note and refunded P182,000, less accrued interest on
the note, of the P240,000 paid on April 1. What entry should Weston make on December
30,2014?
a. Loss on Repossed Franchise………………………… 128,000
Cash…………………………………………………………. 128,000
b. Loss on Repossed Franchise…………………………. 118,400
Cash…………………………………………………………. 118,400
c. Loss on Repossed Franchise…………………………. 278,400
Cash…………………………………………………………. 118,400
Notes Receivable……………………………………… 160,000
d. Revenues from Franchise Fees……………………. 400,000
Interest Income……………………………………….. 9,600
Cash…………………………………………………………. 118,400
Notes receivable…………………………………….... 160,000
Revenue from Repossessed Franchise……… 112,000

6. On January 1, 2014 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 service by January 1, 2014, and the franchisee paid the initial franchise
fee of P560,000 in full on that date. The franchise agreement specifies that the franchisee must
pay a continuing franchise fee of P48,000 annually of which 20% must be spent on advertising
by Dairy Treats. What entry should Daily Treats make on January 1, 2014 to recordreceipt of the
initial franchise fee and the continuing franchise fee for 2014?
a. Cash…………………………………..………………………… 608,000
Franchise Fee Revenue……………..………………. 560,000
 Unearned franchise revenue……………………... 48,000
b. Cash…………………………………..………………………… 608,000
Unearned franchise revenue……………………... 608,000
c. Cash…………………………………..………………………… 608,000
Franchise Fee Revenue……………..………………. 560,000
Unearned franchise revenue……………………... 38,400
Revenue from continuing Franchise Fee……. 9,600
d. Prepaid advertising…………………………..…………… 9,600
Notes receivable…………………………………………… 608,000
Franchise Fee Revenue……………..………………. 560,000
Revenue from continuing Franchise Fee……. 48,000
Unearned franchise Fees…..……………………... 9,600

7. Wynne 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 franchise has the option to purchase P120,000 of
equipment for P96,000. Wynne has substantially provided all initial services required and
collectability of the payments is reasonably assured. The amount of revenue from franchise fees
is:
a. 200,000
b. 721,872
c. 745,872
d. 920,000

8. Cherry Inc. charges an initial franchise fee of P115,000 with P25,000 paid when the agreement
was signed and the balance in five annual payments. The present value of the future payments,
discounted at 10%, is P68,234. The franchise has the option to purchase P15,000 of equipment
for P12,000. Cherry has substantially provided all initial services required and collectability of
the payments is reasonably assured. The amount of revenue from franchise fees is:
a. 25,000
b. 90,234
c. 93,234
d. 115,000

9. Cerette Inc. charges an initial franchise fee of P90,000 broken down as follow:
Rights to trade name, market area, and proprietary know-how………………….. P 40,000
Training services…………………………………………………………………………………………… 11,500
Equipment (cost of P10,800)………………………………………………………………………… 38,500
Total initial franchise fee……………………………………………………………………………… P90,000

Upon signing an agreement, a payment of 40,000 is due. Thereafter, two annual payments of
P30,000 are required. The credit rating of frnchise is such that it would have to pay interest of
 8% to borrow money. The franchise agreement is signed on august 1, 2017 and the franchise
commences operation on November 1, 2017. Assuming that no future services are required by
the franchisor once the franchise begins operation, the entry on November 1, 2017 would
include
a. A credit to Unearned Franchise Revenue for P40,000
b. A debit to service revenue for 11,500
c. A debit to Sales Revenue for 38,500
d. A debit to Unearned Franchise Revenue for 40,000

10. Cerette Inc. charges an initial franchise fee of P90,000 broken down as follow:
Rights to trade name, market area, and proprietary know-how………………….. P 40,000
Training services…………………………………………………………………………………………… 11,500
Equipment (cost of P10,800)………………………………………………………………………… 38,500
Total initial franchise fee……………………………………………………………………………… P90,000

Upon signing an agreement, a payment of 40,000 is due. Thereafter, two annual payments of
P30,000 are required. The credit rating of frnchise is such that it would have to pay interest of
8% to borrow money. The franchise agreement is signed on august 1, 2018 and the franchise
commences operation on November 1, 2018. Assuming that no future services are required by
the franchisor once the franchise begins operation, the entry on November 1, 2018 would
include
a. A credit to Unearned Service Revenue for 11,500
b. A credit to Unearned Service Revenue for 6,000
c. A debit to Sales Revenue for 38,500
d. A debit to Unearned Franchise Revenue for 40,000

Shangri-LA Restaurant sells a franchise that require an initial capital franchise fee of P700, 000. A down
payment of P200, 000 cash is required, with the balance covered by the issuance of 500,000, 10% note
payable by the franchisee in five equal annual installments.

The franchisor accounts for this initial franchise fee depending on the surrounding circumstances related
to the franchise agreement.

11. The franchisor has not substantially performed all materials services, the refund period has
expired and the collectivity of the note is reasonably assured. The franchise revenue amounted
to:
a. P 0 c. P500,000
b. P200,000 d. P700,000

12. The franchisor has substantially performed all material services, refund period has not expired
and collectivity of the note is reasonably assured. The unearned franchise revenue amounted to:
a. P 0 b. P200,000
 c. P500,000 d. P700,000
13. The franchisor has not substantially performed all materials services, the refund period has
expired and there is no reasonably basis for estimating the collectivity of the note or the collection
of the note is very uncertain or extremely uncertain, the entry required is:
a. Cash ………………………………………………………. 200,000
Unearned franchise revenue …………….. 200,000
b. Cash ………………………………………………………. 200,000
Notes receivable ……………………………………. 500,000
Unearned franchise revenue …………….. 700,000
c. Cash ……………………………………………………….. 200,000
Notes receivable …………………………………….. 500,000
Franchise revenue ………………………………. 200,000
Unearned franchise revenue ………………. 500,000
d. Cash ………………………………………………………… 200,000
Notes receivable ……………………………………… 500,000
Franchise revenue ……………………………….. 700,000
14. The franchisor earned only P300,000 from providing initial services with the balance being a down
payment for continuing services, the refund period has expired and the collectivity of the note is
reasonably assured, the entry would be:
a. Cash ………………………………………………….. 200,000
Unearned franchise revenue…………. 200,000
b. Cash ………………………………………………….. 200,000
Notes receivable ……………………………….. 500,000
Unearned franchise revenue …………. 700,000
c. Cash ……………………………………………………….. 200,000
Notes receivable …………………………………….. 500,000
Franchise revenue ………………………………. 300,000
Unearned franchise revenue ………………. 400,000

d. Cash ………………………………………………………… 200,000

Notes receivable ……………………………………… 500,000
Franchise revenue ……………………………….. 700,000

Flapper Jack’s 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 onsite consulting and
troubleshooting, as needed, over the first five years. On March 15, 2014, Anton signed a franchise
contract, paying the standard P6, 000 down with the balance due over 5 years with interest.

15. Assuming that the initial services to be performed by Flapper 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:
a. Unearned franchise fee revenue for P36, 000.
 b. Unearned franchise fee revenue for P30, 000.
c. Franchise fee revenue for P36, 000.
d. Franchise fee revenue for P6, 000.
16. 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, 2014, substantially all continuing
obligations had been met. The journal entry required at October 20, 2014 would include a:
a. Credit to franchise fee receivable for P27, 000.
b. Debit to unearned franchise fee revenue for P36, 000.
c. Credit to franchise fee revenue for P9, 000.
d. Debit to unearned franchise fee revenue for P27, 000.
17. Assume at March 15, 2014, the time of signing the contract, collectability of the receivable was
reasonably assured and there were no significant continuing obligations. The journal entry at
signing would include a:
a. Credit to franchise fee revenue for P36, 000.
b. Credit to franchise fee revenue for P9, 000.
c. Credit to unearned franchise fee revenue for P36, 000.
d. Credit to unearned franchise fee revenue for P27, 000.
18. Nena’s Lechon, Inc. franchisor, entered into a franchise agreement with Aling Nena, franchisee,
on March 31, 2014. The total franchise fee is P500, 000, of which P100, 000 is payable upon signing
and the balance and the balance in four annual installments. The down payment is refundable in
the event the franchisor fails to render services and none thus far had been rendered. Then Nena’s
prepares its financial statements on March 31, 2014, the franchise fee revenue to be reported as:
a. P 0 d. P400,000
b. P100,000

c. P500,000
19. McBee Enterprise, a franchisor, charges franchisees a “franchise fee” of P500, 000. Of this
amount, a nonrefundable P200, 000 is paid upon the signing of the contract with the balance
payable in three equal installments after each year thereafter starting 2015. McBee will assist in
locating a suitable business site, conduct a market study, oversee the construction of facilities,
and provide initial training for employees. On October 1, 2014, McBee entered into a franchising
agreement to cover an entirely new and untested area. By December 31, 2014, McBee had
substantially completed and rendered appropriate services at a total cost of P150,000 but,
somehow, have raised some doubts on the collectivity of the balance of the franchise fee. In its
2014 income statement, McBee Enterprises should recognize profit of:
a. P 50,000
b. P140,000
c. P200,000
d. P350,000
20. Shake Inc. granted a franchise to drake for the greenbelt area. Drake was to pay a franchise fee
of P100, 000 payable in the five equal annual installments starting with the payment upon signing
of the agreement. The franchise was to pay monthly 1% of gross sales of the preceding month.
Should the operation of the outlet prove to be unprofitable in the first year of operations the
franchise fee may be cancelled with whatever obligation owing Shake, Inc. in connection with the
P100, 000franchise fee, waived. On the same year of granting the initial franchise fee, the first
year operation generated gross sales of P500, 000 which is considered to be a profitable
operation. For the first year, Shake, Inc. earned franchise fee of:
a. P 5,000
b. P20,000
c. P 25,000
d. P105,000