Franchise, Consignment and Agency
On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 pieces of bread toasters. Pete was to sell these on consignment at 50%
above cost, for a 15% commission on the selling price. After selling 200 pieces, Pete had the remaining unsold units repaired for some electrical defects
for which he spent ₱2,000. Marion subsequently increased the selling price of the remaining units to ₱330 per unit. On January 31, 20x1, Pete remitted
₱64,980 to Marion after deducting the 15% commission, ₱850 for delivery expenses of sold units, and ₱2,000 for the repair or 100 units.
The consigned goods cost Marion Trading ₱200 per unit, and ₱900 had been paid to ship them to Pete Electrical Shop. All expenses in connection with
the consignment were reimbursable to the consignee.
1. The consignment profit on the units sold was 12,200
2. The value of inventory on consignment was 8,120
3. Prepare all journal entries and closing entries in the books of consignor.
4. Prepare all journal entries in the books of consignee.
The following is the summary of the transactions of the Pagod Na Ako Corporation for the month of June and July 2018:
➢ Transfer of cash to agency-01, 65,000.
➢ Transfer of merchandise to agency-01, 75,000 excluding freight of 5,000.
➢ Disbursements include 45,000 for furnitures and fixtures and manager’s salary and commission chargeable to agency, 30,000.
➢ Received expense vouchers from agency-01: maintenance expense, 8,000; rent paid, 10,000 and advertisement 15,000.
Additional information:
➢ Cost of all goods sold are 200,000.
➢ Furnitures and fixtures have an estimated life of 4 years and salvage value of 3,000.
➢ The home office uses imprest system.
➢ Collection of all receivables from regular sales, 29,000.
➢ Cost of goods sold is 40% of gross profit.
5. Prepare all journal entries in the books of Pagod Na Ako Corporation
6. Prepare Pagod Na Ako Corporation’s income statement for the two-month period ended July 2018.
Mcjobee operates and franchises restaurants around the world. On January 1, 2020, Macjobee entered into a franchise agreement with a franchise.
As part of its franchise agreement, Mcjobee requires the franchisee to pay a non-refundable upfront franchise fee of P 95,000 upon opening a
restaurant and ongoing payment of royalties, based on 10% of franchisee's sales. As part of the franchise agreement, Mcjobee provides pre-opening
services, including supply and installation of cooking equipment and cash registers, valued at P 30,000, which is the stand-alone selling price of the
pre-opening services. In addition, the franchise agreement includes a license of Intellectual Property such as Mcjobee's trademark and trade name to the
franchisee. Mcjobee has determined that the license provides a right to access the Intellectual Property over time. Mcjobee has determined the
stand-alone selling price of the license is P 70,000. The franchise agreement has a term of 10 years. On January 1, 2020, the franchisee paid the
non-refundable upfront franchise fee of P 95,000 to Mcjobee.
Mcjobee evaluates the arrangement and determines it meets the criteria to be accounted for as a contract with a customer under IFRS 15. Mcjobee
determines its pre-opening services and license of Intellectual Property are each distinct and, therefore, need to be accounted for as separate
performance obligations. As of December 31, 2020, Mcjobee already satisfied its performance obligation to supply and install cooking equipment and
cash registers to the franchisee. For the year ended December 31, 2020, the franchisee reported sales revenue of P 100,000.
7. Under IFRS 15, how much total revenue shall be recognized by Mcjobee for the year ended December 31, 2020? P 45,150
8. Prepare the necessary journal entries on 2020.
On July 1, 20x1, ABC Co. entered into three franchise agreements. Information on these agreements is summarized below:
Franchisee Probability of Collection
Cash Down payment
PV of Note
Direct Costs Incurred
A
Reasonably assured
20,000
60,747
32,000
B
Uncertain
20,000
48,037
25,000
C
Significantly uncertain
20,000
33,801
21,520
Additional information:
⚫ The cash down payments are non-refundable and were received upon the signing of contracts.
⚫ The appropriate discount rate on all of the contracts is 12%. The first installment on each of the notes receivable is due on July 1, 20x2.
⚫ It was assessed that the receivable from franchisee B is doubtful of collection. This is because, at contract inception, ABC Co. determines that the
region where the customer operates is undergoing economic difficulty. Therefore, ABC Co. expects that the consideration will not be collected in full.
However, ABC Co. believes that the region’s economy will recover in the near term and that the license will help the customer increase its sales.
Accordingly, ABC Co. expects to provide the customer a price concession and concludes that it is probable that it will collect only half of the 48,000
note receivable. The adjusted present value of the note is 24,018. The adjusted rate is 12%.
⚫ All the three licenses provide the customers the right to use the entity’s intellectual property as it exists at the point in time at which the license is
granted.
⚫ The licenses are transferred to the customers on July 1, 20x1.
9. How much is the net income in 20x1? 74,879
10. Prepare the journal entries on July 1, 20x1.