FRANCHISE ACCOUNTING

Problem I
On December 31, 2020, Mack Do authorized to grant Michael & Company to operate as a franchisee for an initial
fee of P150,000. Of this amount, P60,000 was received upon signing the agreement and the balance, represented
by a note, is due in three annual payments of P30,000 each beginning December 31, 2021. The present value on
December 31, 2020 of the three annual payments appropriately discounted is P72,000. According to the
agreement, the non-refundable down payment represents a fair measure of the services already performed by
Mack Do; however, substantial future services are required of Mack do. Collectability of the note is reasonably
certain.
Mack Do's December 31, 2020 Balance Sheet, unearned franchise fees should be reported as

Problem II
December 31, 2020 The Fast Track, Inc. charges an initial franchise fee of P4,500,000 for the right to operate as
a franchise fee of Fast Track. Of this amount, 1,500,000 is collected. The balance is collectible in four annual
Installments of P1,000,000 each every December 31, starting 2021. The PV of 1 for 4 periods at 10% is .6830
while the PV of an annuity of 1 for 4 periods at 10% is 3.1699.
January 2021 - The franchisor visited the proposed site and gave the go signal to start the construction of the
building
June 1, 2021 - Started training the manpower
July 1, 2021 - The franchise started its operation.
December 31, 2021 - The first annual payment was received and the franchisee reported total sales of
P2,500,000.
The franchisor incurred P250,000 in relation to this franchise. Other terms of the agreement include a continuing
royalty fee equal to 5% of annual gross sales.
1. The entry to record the above activity on December 31, 2020 was:
2. Assuming the initial down payment is not refundable, and the collectability of the note is assured, the amount
of revenue recognized on December 31, 2020 is:
3. The total revenue to be recognized by Fast Track, Inc on December 31, 2021 assuming the collectability of the
note is reasonably assured amounted to:

Problem III
Lighthouse Company sells a franchise that requires an initial franchise fee of P70,000. A down payment of
P20,000 cash is required with the balance covered by the issuance of a P50000, 10% notes payable by the
franchisee in five annual equal installments.
All the material services have been substantially performed by the franchisor, and the refund period has expired,
but the collectability of the note is not reasonably assured.
The (1) earned and (2) unearned franchise revenue at the opening of the outlet is