FRANCHISE ACCOUNTING

SOLUTIONS TO MULTIPLE PROBLEMS

PROBLEM 1

Installment Method:

Initial franchise fee………………………………………………………………………… P 400,000

Less: Direct cost of franchise……………………………………………………………… 140,000
Gross profit P 260,000

GP rate = P 260,000 / P 400,000 = 65%

Downpayment……………………………………………………………………………… P 100,000
Initial installment payment………………………………………………………………… 75,000
Total collection…………………………………………………………………………….. P 175,000
Multiply by GP rate 65%
Realized gross profit P 113,750

PROBLEM 2

Downpayment……………………………………………………………………………… P 3,500,000
Present value of NR (9,000,000/5) 1,800,000 x 3.352……………………………………. 6,033,600
Adjusted sales value of initial franchise fee……………………………………………….. P 9,533,600
Less: Direct cost of services……………………………………………………………….. 4,290,120
Gross profit P 5,243,480

Gross profit rate = (5,243,480 ÷ 9,533,600) = 55%

Date Collection Interest Principal Balance of PV of NR

01.01.12 6,033,600
12.31.12 1,800,000 905,040 894,960 5,138,640

Downpayment……………………………………………………………………………… P 3,500,000
Collections applying to principal…………………………………………………………... 894,960
Total collections……………………………………………………………………………. P 4,394,960
Multiply by GP rate………………………………………………………………………... 55%
Realized gross profit on initial franchise fee………………………………………………. P 2,417,228
Continuing franchise fee (1,800,000 x 3%)……………………………………………….. 54,000
Interest income…………………………………………………………………………….. 905,040
Less: Indirect costs………………………………………………………………………… 175,000
Net Income P 3,201,268

PROBLEM 3

Franchise Revenue:
Downpayment…………………………………………………………………… P 30,000
PV of installment (75,000 x 3.04)………………………………………………. 228,000
Total Franchise Revenue…………………………………………………………………. P 258,000
Less: Direct Franchise Cost………………………………………………………………. (195,000)
Gross Profit……………………………………………………………………………….. P 63,000
Less: Franchise Expense………………………………………………………………….. (18,750)
Operating Income………………………………………………………………………… P 44,250
Add: Interest Income (228,000 x 12% x 1/12)………………………………………….. 2,280
Net Income P 46,530
 FRANCHISE ACCOUNTING

PROBLEM 4

Realized gross profit from initial franchise fee [(350,000 + 90,000) x 37%] P 162,800
Continuing franchise fee (P 121,000 + P 147,500) x 5% 13,425
Total revenue 176,225
Expenses 42,900
Net operating profit 133,325
Interest income (P 900,000 x 15%) x 6/12 67,500
Net income P  200,825

PROBLEM 5

Deferred Revenue from franchise fee:

Downpayment P 6,000,000
Present value of the note (P 1,000,000 X 2.91) 2,910,000 P 8,910,000
Less: Cost of franchise fee 2,000,000
Deferred gross profit P 6,910,000

Gross profit rate (6,910,000/ 8,910,000) 77.55%

Downpayment (collection during 2013) P 6,000,000

Gross profit rate 77.55%
Realized gross profit from initial franchise fee P 4,653,000
Add: Continuing franchise fee (5,000,000 X .05) 250,000
Total P 4,903,000
Less: Franchise expense 50,000
Operating income P 4,853,000
Interest income, 12/31/05 (P 2,910,000 X 14%) X 6/12 203,700
Net income P 5,056,700

PROBLEM 6

Downpayment…………………………………………………………………………………………P 300,000
Collection for 1st installment…………………………………………………………………………. 150,000
Total collection P 450,000
Multiply by…………………………………………………………………………………………… 80%
Realized gross profit P 360,000

PROBLEM 7

Under accrual method, the collection of initial franchise fee is reasonably assured. At the end of the year, the initial
franchise fee will be recognized as revenue and will not be deferred.
 FRANCHISE ACCOUNTING

PROBLEM 8

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

Franchise Revenue:
Initial franchise fee:
Downpayment………………………………………….. P 30,000
PV of installment (P 10,000 x 1.7355)………………… 17,355 P 47,355
Continuing Franchise Fee:
5% x P 500,000………………………………………… 25,000
Total Franchise Revenue………………………………………………….. P 72,355
Add: Interest income……………………………………………………… 1,735
Total Revenue P 74,090

PROBLEM 9

Downpayment……………………………………………………………………………….. P 100,000
PV of installment……………………………………………………………………………. 199,650
Continuing Franchise Fee (9M x 5%)………………………………………………………. 450,000
Total Earned Revenue P 749,650