Franchise fees are properly recognized as revenue

when received in cash.

when a contractual agreement has been signed.

after the franchise business has begun operations.

after the franchiser has substantially performed its service.

Some of the initial franchise fee may be allocated to

continuing franchise fees.

interest revenue on the future installments.

options to purchase the franchisee's business.

all of these may reduce the amount of the initial franchise fee that is recognized as revenue.

Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases
of equipment or supplies. When recording the initial franchise fee, the franchisor should

increase revenue recognized from the initial franchise fee by the amount of the expected future
purchases.

record a portion of the initial franchise fee as unearned revenue which will increase the selling
price when the franchisee subsequently makes the bargain purchases.

defer recognition of any revenue from the initial franchise fee until the bargain purchases are
made.

None of these.

A franchise agreement grants the franchisor an option to purchase the franchisee's business.

It is probable that the option will be exercised. When recording the initial franchise fee, the

franchisor should

record the entire initial franchise fee as a deferred credit which will reduce the franchisor's
investment in the purchased outlet when the option is exercised.

record the entire initial franchise fee as unearned revenue which will reduce the amount of cash
paid when the option is exercised.

record the portion of the initial franchise fee which is attributable to the bargain purchase option
as a reduction of the future amounts receivable from the franchisee.

None of these.
Continuing franchise fees should be recorded by the franchisor

as revenue when earned and receivable from the franchisee.

as revenue when received.

in accordance with the accounting procedures specified in the franchise agreement.

as revenue only after the balance of the initial franchise fee has been collected.

On January 1, 2017 Dairy Delight, Inc. entered into a franchise agreement with a company

allowing the company to do business under Dairy Delight's name. Dairy Delight had performed

substantially all required services by January 1, 2017, and the franchisee paid the initial

franchise fee of P105,000 in full on that date. The franchise agreement specifies that the

franchisee must pay a continuing franchise fee of $9,000 annually, of which 20% must be

spent on advertising by Dairy Delight. What entry should Dairy Delight make on January 1,

2017 to record receipt of the initial franchise fee and the continuing franchise fee for 2017?

a. Cash 114,000

Franchise Fee Revenue 105,000

Revenue from Continuing Franchise Fees 9,000

b. Cash 114,000

Unearned Franchise Fees 114,000

c. Cash ` 114,000

Franchise Fee Revenue 105,000

Revenue from Continuing Franchise Fees 7,200

Unearned Franchise Fees 1,800

d. Prepaid Advertising 1,800

Cash 114,000

Franchise Fee Revenue 105,000

Revenue from Continuing Franchise Fees 9,000

Unearned Franchise Fees 1,800

On April 30, 2017, 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 annual
installments every December 1, starting in 2017. 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%.
Round PV factor to two decimal places.

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 costs of P72,000, of which 18,000 is related to continuing
services. The franchisee started business operations on September 2, 2017 and was able to generate
sales of P950,000 for 2017. The first installment payment was made in due date.

Assuming that the collectability of the note is not reasonably assured, how much is the net income of
the franchisor for the fiscal year ended December 1, 2017?

P252,206

P174,508

P172,650

P254,935

Solution: Cash 400,000

NR PV (160,000x3.79) _606,400

Total Revenue 1,006,400

Direct cost (540,000-170,000) (370,000)

Gross Profit 636,400

Gross Profit % 63.24%

Cash 400,000

NR principal payment

(160,000 – 10%(606,400)(7/12) 124,627

Total collection 524,627

Gross Profit Rate 63.24%

Realized Gross Profit 331,774

 Realized Gross Profit 331,774

Interest income

(10%(606,400)(7/12)) 35,373

Continuing franchise fee

(950,000 x 5%) 47,500

Total revenue 414,647

Direct cost of continuing

services (170,000)

Indirect cost (72,000)

Net income 172,647

Spiral Restaurant sold a fine dining restaurant franchise to Circles Hotel. The sale agreement signed
on January 1, 2017 called for a P875,000 down payment plus 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 franchisee to pay 6% of its gross sales to
the franchisor. The restaurant operated in July and its sales for the year amounted to P6,562,500.
Assuming a 15% interest rate is appropriate, round PV factor to two decimal places.

How much is the franchisor’s total revenue for the year ended 2017 income statement?

P2,266,250

P2,415,875

P2,022,125

P2,403,405

On August 1, 2017, Holiday Inc. entered into a franchise agreement with intense franchisee. The
initial franchise fees 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 a high credit rating, thus, collection of
the note is reasonably assured. Out-of-pocket costs of P125,331 and P12,345 were incurred for direct
expenses and indirect expenses respectively. Prevailing market rate is 9%. Round PV factor to four
decimal places.

On the fiscal year ended September 30, 2017, how much revenue from franchise fee will the
franchisor recognize?
 P208,885

P246,900

P0

P83,554

On December 1, 2017, 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, 2018. The present value on December 1, 2017, for three annual payments
appropriately discounted is P288,000. According to the agreement, the non-refundable down
payment represents a fair measure of the services already performed by Zach and substantial future
services are still to be rendered. Collectability of the note is reasonably certain.

On December 31, 2017 Statement of Financial Position how much should Zach report as unearned
franchise fee from Movers Company?

P528,000

P360,000

P400,000

P288,000

On December 31, 2017, Mcqueen, Inc. authorized Mr. Chun to operate as a franchisee for an initial
franchise fee of P150,000. Of this amount, P60,000 was received upon signing the agreement and the
balance represented by a note due in three annual payments of P30,000 each beginning December
31, 2018. The present value on December 31, 2017, for 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 Mcqueen and substantial future services are still to
be rendered. However, the collectibility of the note is not reasonably assured. Mcqueen’s December
31, 2017, balance sheet unearned franchise fee from Mr. Chun’s franchise should report as:

P132,000

P100,000

P0

P72,000

Wynne Inc. charges an initial franchise fee of P1,380,000, with P300,000 paid when the agreement is
signed and the balance in five annual payments. The present value of the future payments,
discounted at 10%, is P818,808. The franchisee has the option to purchase P180,000 of equipment
for $144,000. Wynne has substantially provided all initial services required and collectibility of the
payments is reasonably assured. The amount of revenue from franchise fees is

P300,000.

P1,082,808.

P1,118,808.

P1,380,000.

Yount 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 franchisee has the option to purchase
P120,000 of equipment for P96,000. Yount has substantially provided all initial services required
and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees
is

P200,000.

P721,872.

P745,872.

P920,000.

On January 2, 2017, ABC Corp. entered into a franchise agreement with XYZ Corp. to sell their
products. The agreement provides for an initial franchise fee of P2,812,500, P787,500 of which is
payable upon signing the contract and the balance in five equal annual installments payable every
December 31 and starting on December 31, 2017. ABC signs a 15% interest bearing note for the
balance. The agreement further provides that the franchisee must pay a continuing franchise fee
equal to 5% of its monthly gross sales. On October 30, 2017, the franchisor completed the initial
services required in the contract at a cost of P900,000 and incurred indirect costs of P180,000. The
franchise commenced business operations on November 3, 2017. The gross sales reported to the
franchisor are P92,250 for November and P106,875 for December. The first installment payment was
made on due date. Assume that the collection of the note is not reasonably assured.

In ABC’s income statement for the year ended December 31, 2017, how much is the income from
franchise operations?

P972,855.00

P640,856.25

P847,406.25

P944,606.25
On January 1, 2017, Best Foods Corporation granted a franchise to Mr. X to operate a sales outlet.
The franchisor is to provide initial and continuing services for an initial and continuing services for an
initial fee of P200,000 and an annual fee of 5% based on gross sales. The franchisee pays 25% of the
required initial fee upon signing of the contract and undertakes to pay 50% upon substantial
performance of the initial services by the franchisor and the balance, one year after. The franchisor is
able to provide substantially all of the initial services as of March 10, 2017 at a total cost of P120,000.
During the year, franchisee’s sales amount to P3,000,000. How much revenue is recognized by the
franchisor upon signing of the contract?

P200,000

P100,000

P50,000

P300,000

P-0-

Using the same data as the previous number, how much franchise fee revenue must appear on the
books of the franchisor for 2017?

P200,000

P350,000

P300,000

P400,000

On December 31, 2017, Rice, Inc. authorized Graf to operate as a franchise for an initial franchise 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,
2017. The present value on December 31, 2017 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 Rice; however, substantial future services are
required of Rice. Collectibility of the note is reasonably certain. In Rice’s December 31, 2017 balance
sheet, unearned franchise fees from Graf’s franchise should be reported as

P132,000

P100,000

P90,000

P72,000
Each of Potter Pie Co.’s twenty-one new franchisees contracted to pay an initial franchise fee of
P30,000. By December 31, 2017, each franchisee had paid a non-refundable P10,000 fee and signed a
note to pay P10,000 principal plus the market rate of interest on December 31, 2017 and December
31, 2018. Experience indicates that once franchisee will default on the additional payments. Services
for the initial fee will be performed in 2018. What amount of net unearned franchise revenue would
Potter report at December 31, 2017?

P400,000

P600,000

P610,000

P630,000

Corny Island Inc. sells franchises for ice cream outlets in Metro Manila. One contract has been signed
on January 15,2016. The agreement calls for an initial franchise fee of P6,000,000 to be paid by the
franchise upon signing of the contract. The franchisor initial cost of services is P2,250,000 to be
incurred uniformly over the 6 month period / prior to the scheduled opening date of July 15, 2017.
No return payments are to be made by the franchisor, although there will be continuing costs of
P180,000 per year for services rendered during the 10 year term of contract. The normal return for
the franchisor on continuing operation involving franchise outlets is 10%. How much net income
would be recognized by the franchisor on July 15, 2017?

P3,750,000

P6,000,000

P5,750,000

P1,750,000

*Note that the P180,000 is cost not continuing franchise fee. There’s no continuing franchise
fee but there should have been in the amount of P200,000 (180,000/90%). Deferred franchise
should be computed as (180,000/90%)*(10).

On December 31, 2011, Maxes Inc. signed an agreement authorizing Antoks Company to operate as a
franchise for an initial franchise fee of P50,000. Of this amount, P20,000 was received upon signing of
the agreement and the balance is due in three annual payment of P10,000 each, beginning
December 31, 2012. No future services are required to be performed. Antoks Company’s credit rating
is such that collection of the note is reasonably assured. The present value at December 31, of the
three annual payments discounted at 14% (the implicit rate for a loan of this type) is P23,220. On
December 31, 2011, Maxes should record earned franchise fees of:

P23,220

P43,220
 P30,000

P 0

On April 1, 2017 Reebles, Inc. entered into a franchise agreement with a local business-man.

The franchisee paid P75,000 and gave a P50,000, 8%, 3-year note payable with interest due

annually on March 31. Reebles recorded the P125,000 initial franchise fee as revenue on April

1, 2017. On December 30, 2017, the franchisee decided not to open an outlet under Reebles'

name. Reebles canceled the franchisee's note and refunded P40,000, less accrued interest on

the note, of the P75,000 paid on April 1. What entry should Reebles make on December 30,

2017?

a. Loss on Repossessed Franchise 40,000

Cash 40,000

b. Loss on Repossessed Franchise 37,000

Cash 37,000

c. Loss on Repossessed Franchise 87,000

Cash 37,000

Note Receivable 50,000

d. Revenue from Franchise Fees 125,000

Interest Income 3,000

Cash 37,000

Note Receivable 50,000

Revenue from Repossessed Franchise 35,000

Use the following to answer questions no. 22 to no. 24

Happy Jack's Pancake Restaurants 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 on-site consulting and troubleshooting, as needed, over the first five years. On

March 15, 2017, Tim Cruise signed a franchise contract, paying the standard P6,000 down with the

balance due over 5 years with interest.

Assuming that the initial services to be performed by Happy 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:

Franchise fee revenue for P36,000.

Franchise fee revenue for P6,000.

Unearned franchise fee revenue for P36,000.

Unearned franchise fee revenue for P30,000.

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, 2003, substantially all continuing
obligations had been met. The journal entry required at October 20, 2003 would include a:

Credit to franchise fee receivable for P27,000.

Credit to franchise fee revenue for P9,000.

Debit to unearned franchise fee revenue for P36,000.

Debit to unearned franchise fee revenue for $27,000.

Assume at the time of signing the contract, collectibility of the receivable was reasonably assured and
there were no significant continuing obligations. The journal entry at signing would include a:

Credit to franchise fee revenue for P36,000.

Credit to franchise fee revenue for P9,000.

Credit to unearned franchise fee revenue for P36,000.

Credit to unearned franchise fee revenue for P27,000.

Slater, Inc. grants a franchise to Mr. Greenwitch for an initial franchise fee of P1,000,000. The
agreement provides that Slater, Inc. has the option within the one year to acquire franchisee’s
business and it seems certain that Slater, Inc. will exercise the option. On Slater, Inc. books, how
should the initial franchise fee be recognized?

Deferred revenue and to be amortized.

Realized revenue.

Extraordinary revenue.

Deferred revenue and treated as a reduction from Slater’s investment when the option is
exercise.