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Question #1

Nonong’s Lechon, Inc. franchiser, entered into franchise agreement with Aling Nonong,
franchise, on March 31, 2016. The total franchise fee is 500,000, of which 100,000 is
payable upon signing and the balance in four equal annual installments. The
downpayment is refundable in the event the franchiser fails to render services and none
thus far had been rendered. When Nonong’s prepares its financial statements on March
31, 2016, the franchise fee revenue to be reported is:
400,000 500,000 100,000 0
SOLUTION:
The franchise fee revenue should be zero, since, no substantial performance of
services had been performed (and the downpayment is still refundable.)
Advanced Accounting - 02 Revenues from Customers (Easy)

Question #2
Some of the initial franchise fee may be allocated to
All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
options to purchase the franchisee's business.
continuing franchise fees.
interest revenue on the future installments.

Advanced Accounting - 02 Revenues from Customers (Easy)

Question #3
Installments accounts receivable, 12/31/2016 200,000
Deferred gross profit, 12/31/2016 (before recognition of realized gross profit) 140,000
Gross profit on sales 40%
Kristine Company which began business on January 1, 2016, appropriately uses the
installment sales method of accounting. The following data are available for 2016:
The realized gross profit on installment sales for the year ended December 31, 2016
should be.
65,000 80,000 60,000 75,000
Installment Sales  
Deferred gross profit, before adjustment / gross profit rate (140,000 / 40%) 350,000
Less: Installment Accounts Receivable, 12/31/2016 200,000
Collections 150,000
Multiplied by the gross profit rate 40%
Realized gross profit 60,000
SOLUTION:
Advanced Accounting - 02 Revenues from Customers (Average)

Question #4
Under the completed-contract method
revenue, cost, and gross profit are recognized during the production cycle.
none of these.
revenue, cost, and gross profit are recognized at the time the contract is completed.
revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.

Advanced Accounting - 02 Revenues from Customers (Average)

Question #5
Francis Enterprise uses the installment method of accounting and it has the following
data at the year-end:
Gross margin on cost 66-2
Unrealized gross profit 192,
Cash collections including down payments 360,
What was the total amount of sales on installment basis?
552,000 648,000 480,000 840,000
SOLUTION:
Installment accounts receivable, end of year:
Unrealized gross profit/gross profit rate = 192,000/(66 2/3/166 2/3) 480,000
Add: Collections 360,000
Installment sales 840,000
Advanced Accounting - 02 Revenues from Customers (Easy)

Question #6
The process of formally recording or incorporating an item in the financial statements of
an entity is
realization.
recognition.
articulation.
allocation.

Advanced Accounting - 02 Revenues from Customers (Easy)

Question #7
The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator based on
Nil current market value of the right specified or determinable amounts or the
shortfall, if any, between amounts received from users of the public services and
specified or determinable amount, even if payment is contingent on the operator
ensuring that the infrastructure meets specified quality or efficiency requirements.
future value of the said unconditional right
Advanced Accounting - 02 Revenues from Customers (Easy)

Question #8
Which of the following is not an accurate representation concerning revenue
recognition?
Revenue from disposing of assets other than products is recognized at the date of
sale.
Revenue from services rendered is recognized when cash is received or when
services have been performed.
Revenue from permitting others to use enterprise assets is recognized as time
passes or as the assets are used.
Revenue from selling products is recognized at the date of sale, usually interpreted
to mean the date of delivery to customers.

Advanced Accounting - 02 Revenues from Customers (Easy)

Question #9
Saisaki Corporation grants a franchise to Mity for an initial franchise fee of 1,000,000.
The agreement provides that Saisaki has the option within one year to acquire
franchisee’s business, and it seems certain that Saisaki will exercise this option. On
Saisaki’s books, how should the initial fee be recorded?
Deferred and treated as reduction in Saisaki investment when the option is
exercised. Deferred revenue to be amortized. Extraordinary revenue Realized
Revenue
SOLUTION:
A franchise agreement may give the franchiser an option to purchase the franchisee’s
business. For example, as a matter of management policy, the franchisor may reserve
the right to purchase a profitable franchised outlet, or to purchase one that is in financial
difficulty. If it is probable at the time the option is given that the franchisor will ultimately
purchase the outlet, then the initial franchise should be recorded as liability. When the
option was exercised, the liability would reduce the franchisor,s investment in the outlet.
Since, Saisaki’s option to purchase the franchise is considered certain, then the initial
franchise fee (IFF) should be deferred as revenue. When the option is exercised and
Saisaki (the franchisor) acquires the franchisor’s investment in the outlet. Incidentally,
the entry on the books of the franchisor upon receipt of the initial franchise fee would
be:
Cash (or Notes Receivable) 1,000,000  
Deferred Franchise Option (Liability)   1,000,000
Advanced Accounting - 02 Revenues from Customers (Average)

Question #10
Philip’s entered into a franchise agreement with Rusty. As per agreement on July 1,
2016, Rusty is to pay Philip an up-front franchise fee of 1,000,000 and subsequent
annual franchise fees of 50,000 over the next four years. Cost of initial franchise
services rendered by Philip’s during the year is 250,000 which is substantial, and it
estimates the cost of subsequent annual services to be 10,000. Rusty paid the annual
franchises fee for 2017, and Philip’s rendered the services for the year. In its December
31, 2017 income statement, the amount of realized franchise fee revenue to be reported
by Philip’s is:
25,000 300,000 250,000 50,000
SOLUTION:
In 2016, the initial franchise fee of 1,000,000 is recognized as revenue. Therefore, in
2017 the only amount of revenue to be recognized is the 50,000, the continuing
franchise fee.
Advanced Accounting - 02 Revenues from Customers (Easy)