PAMANTASAN NG LUNGSOD NG VALENZUELA

LONG TERM CONSTRUCTION

Quiz

Headache 1. On September 1, 2011 , Cindy company entered into franchise agreements with two
franchisees. The agreements required an initial franchise fee payment of P700,000 plus four P300,000
payments are due every four months, the first payment due on December 31, 2011. The market interest
rate is 12%. The initial deposit refundable until substantial performance has been completed, the
following table describes each agreements:
Franchisee Probability of Full Services Performed by Total Cost incurred to
Collection Franchisor December Dec. 31 , 2011
31, 2011
A Likely Substantially 700,000
B Doubtful 25% N/A
The present value tables at 4% for four (4) periods were as follows:
Present Value of P1 .8548
Present Value of an ordinary annuity of P1 3.6299
Future Value of P1 1.1699
Future Value of an ordinary annuity of P1 4.2465
What amount of net income to be reported in 2011, assuming P1,000,000 was received from each
franchisee during the year:
1. Franchise A
2. Franchise B
Headache 2. DJ builders Enterprises, a franchisor, charges franchisees a franchise fee of P500,000. Of
this amount, a nonrefundable 200,000 is paid upon the signing of the contract with the balance in three
equal installments after each year thereafter. DJ Builders will assist in locating a suitable business site,
conduct a market study, oversee the construction of facilities, and provide initial training for employees.
On December 1, 2011 , DJ Builders signed a franchise agreement for the U-belt area. By the end of 2011,
it was determined that substantial performance of the initial services had cost DJ Builders a total of
P150,000 and that collection of the balance of the franchise fee has been reasonably assured. In its 2011
income statement, DJ builders should report:
3. Franchise Revenue
4. Net Income
Headache 3. On April 30, 2014, 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 installments
every December 1, starting in 2014. 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%. 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 cost of P72,000 of which P18,000 is related to continuing services. The
franchisee started business operations on September 2, 2014 and was able to generate sales of P950,000
for 2014. The first installment due was made on due date. Assuming the collectability of the note is not
reasonably assured.
5. How much is the net income of the franchisor for the fiscal year ended December 1, 2014?
Headache 4. Spiral Restaurant sold a fine dining restaurant to Circles Hotel. The sales agreement signed
on January 1, 2014 called for a P875,000 down payment plus a 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 franchise to pay 6% of its gross sales to the 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 an annuity of P1 at 15% for three periods is 2.28.
6. How much is the franchisor’s total revenue for the year ended 2014 income statement?
Headache 5. On August 1, 2014, Holiday Inc. entered into a franchise agreement with Intense franchisee.
The initial franchise fees are 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 high credit rating, thus, collection of the note is

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reasonably assured. Out-of-pocket cost 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.
7. On the fiscal year ended September 30, 2014, how much revenue from franchise fee will the
franchisor recognize?
Headache 7. On December 1, 2014, 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, 2015. The present value on December 1, 2014, for three annual payments appropriately
discounted at P288,000. According to the agreement, the nonrefundable deposits down payment
represents a fair measure of the services already performed by Zach and substantial future services are
still to be rendered. However, the collectability of the note is reasonably certain.
8. On December 31, 2014 Statement of Financial Position how much should Zach report as
unearned franchise fee from Movers Company?

Headache 8. Tony awarded its Cebu franchise to Jara Co. for a total fee of P100,000. Of the said amount ,
P50,000 was payable to upon signing the agreement and the balance in two equal annual payments. The
contract provided that in the event the first year would result in an operating loss, the franchise agreement
may be cancelled. No services had so far been rendered.
9. What is the entry to record the granting of the Cebu franchise by Tony to Jara Co.?
Headache 9. Shakes Inc., franchisor, enters into a franchising agreement with Sha, franchisee, on June
30, 2011. The agreement calls for a total franchise fee of P1,000,000 of which P100,000 is payable upon
the signing of the contract and the balance in four equal semi-annual installments. It is agreed that the
down payment is nonrefundable notwithstanding lack of substantial performance of services by the
franchisor.
10. When Shake’s Inc. prepares its financial statements as of June 30, 2011, how much is the
unearned franchise fee to be reported?
Headache 10. On December 29, 2011, Pizza hot signed a franchising agreement for the operation of an
outlet in Dagupan City by Nipa Co. the franchising agreement required the franchisee, Nipa Co. make an
initial payment of P200,000 upon signing of the contract and three payments each of P100,000 beginning
one year from the agreement date and yearly thereafter. The franchisor agrees to make market studies,
find a suitable location, train employees, and perform some other related services by next year. The initial
payment is refundable until substantial performance is effected.
11. At the end of 2011, Pizza Hot, should report franchise fee revenue of:
Headache 11. Ferragamo entered into a franchise agreement with Rusty. As per agreement on July 1,
2011, Rsuty is to pay Ferragamo an up-front franchise fee of P1,000,000 and subsequent annual franchise
fees of 50,000 over the next four years. Cost of initial franchise services rendered by Ferragamo during
the year is P250,000 which is substantial, and it estimates cost of subsequent annual services to be
P10,000. Rusty paid the annual franchise fee for 2012, and Ferragamo’s rendered the services for the year.
In its December 31, 2012 income statement.
12. The amount of realized franchise fee revenue to be reported by Ferragamo’s is?
Headache 12. Cherry Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the
agreement was signed and the balance in five equal annual payments. The present value of future
payments, discounted at 10% is P68,234. The franchisee 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.
13. The amount of revenue from franchise fees is?
Headache 13. On may 31, 2011, Kenny received P200,000 from Rogers representing the down payment
on the franchise agreement signed in that date. Rogers issued promissory notes for the balance of
P1,000,000, payable in four equal semi-annual installments. Franchise services are substantially
completed by Kenny on semi-annual installment due on November 20, 2011 at an aggregate cost of
P900,000. The first semi-annual installment due on November 30, 2011 was appropriately paid by
Rogers. Accordingly, Kenny uses the accrual method of accounting in recording franchise fee revenue.
14. In its December 31, 2011 financial statements, how much would Kenny report as deferred
franchise fee revenue for the year?

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Headache 14. SSR Restaurant Inc., sold a fastfood restaurant franchise to Shar. The sale agreement,
signed on January 2, 2011, called for a P30,000 down payment plus two P10,000 annual payments,
representing the value of initial franchise services rendered by SSR Restaurant. In addition, the agreement
required the franchisee to pay 5% of its gross revenue 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.
15. Assuming a 10% interest rate is appropriate, SSR Restaurant’s in 2011 total revenue will be?(The
present value of an ordinary annuity of P1 at 10% for 2 periods in 1.7355)
Headache 15. On may 15, 20x4, AA Sales Company received a shipment of merchandise with a selling
price of P15,000 from PC Company. The consigned goods cost PC company P10,000 and freight charges
of P120 had been paid to sip the goods to AA Sales Company.
The consignment arrangement provided for a sale of merchandise on credit with terms of 2/10, n/30. The
15% commission is to be based on the accounts receivable collected by the consignee. Cash discounts
taken by the customers, expenses applicable to goods on consignment and any cash advanced to the
consignor are deductible from the remittance by the consignee.
AA Sales Company advanced P6,000 to PC Company upon receipt of the shipment. An expense of P800
was paid by AA. By June, 20x4, 70% of the shipment had been sold, and 80% of the resulting accounts
receivable had been collected, all within the discount period . remittance of the amount due was made on
June 30, 20x4.
16. The cash remitted by AA Sales Company is:
17. The profit on consignment is:
18. The cost of unsold units in the hands of AA is:
Headache 16. on October 1, 20x4, the NN Company consigned one hundred wall clocks to P &G
Retailers, Inc. each wall clock had a cost of P150. Freight on the shipment was paid by NN Company for
P200. On December 1, 20x4, P&G submitted an account sales stating that it had sold sixty pieces and it
was remitting the P12,480 balance due. The remittance was net of the following deductions from the sales
price of the walls clocks sold:
Commision(20% of sales price) ?
Advertising P500
Delivery and installation P100

19. What was the total sales price of the walls clock sold by P&G Retailers, Inc.?
20. What was the cost of inventory on consignment?

-end of examination-

“Education is our passport to the future, for tomorrow belongs to the people
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― Malcolm X

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