1. Franchise fees are properly recognized as revenue
a. when received in cash.
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.
2. Some of the initial franchise fee may be allocated to
a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. all of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
3. 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
a. increase revenue recognized from the initial franchise fee by the amount of the expected
future purchases.
b. 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.
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases
are made.
d. None of these.
4. 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
a. 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.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of
cash paid when the option is exercised.
c. 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.
d. None of these.
5. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
6. 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
7. 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 noninterest 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?
a. P252,206
b. P174,508
c. P172,650
d. 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
Gross Profit %
636,400
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
Interest income
(10%(606,400)(7/12))
Continuing franchise fee
(950,000 x 5%)
Total revenue
Direct cost of continuing
services
Indirect cost
Net income
331,774
35,373
47,500
414,647
(170,000)
(72,000)
172,647
8. 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?
a. P2,266,250
b. P2,415,875
c. P2,022,125
d. P2,403,405
9. 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?
a. P208,885
b. P246,900
c. P0
d. P83,554
10. 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 nonrefundable 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?
a. P528,000
b. P360,000
c. P400,000
d. P288,000
11. 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 nonrefundable 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:
a. P132,000
b. P100,000
c. P0
d. P72,000
12. 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
a. P300,000.
b. P1,082,808.
c. P1,118,808.
d. P1,380,000.
13. 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
a. P200,000.
b. P721,872.
c. P745,872.
d. P920,000.
14. 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?
a.
b.
c.
d.
P972,855.00
P640,856.25
P847,406.25
P944,606.25
15. 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?
a. P200,000
b.
c.
d.
e.
P100,000
P50,000
P300,000
P-0-
16. Using the same data as the previous number, how much franchise fee revenue must appear on
the books of the franchisor for 2017?
a. P200,000
b. P350,000
c. P300,000
d. P400,000
17. 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
a. P132,000
b. P100,000
c. P90,000
d. P72,000
18. 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?
a. P400,000
b. P600,000
c. P610,000
d. P630,000
19. 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?
a. P3,750,000
b. P6,000,000
c. P5,750,000
d. 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).
20. 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:
a. P23,220
b. P43,220
c. P30,000
d. P 0
21. 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.
22. 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:
a. Franchise fee revenue for P36,000.
b. Franchise fee revenue for P6,000.
c. Unearned franchise fee revenue for P36,000.
d. Unearned franchise fee revenue for P30,000.
23. 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:
a. Credit to franchise fee receivable for P27,000.
b. Credit to franchise fee revenue for P9,000.
c. Debit to unearned franchise fee revenue for P36,000.
d. Debit to unearned franchise fee revenue for $27,000.
24. 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:
a. Credit to franchise fee revenue for P36,000.
b. Credit to franchise fee revenue for P9,000.
c. Credit to unearned franchise fee revenue for P36,000.
d. Credit to unearned franchise fee revenue for P27,000.
25. 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?
a. Deferred revenue and to be amortized.
b. Realized revenue.
c. Extraordinary revenue.
d. Deferred revenue and treated as a reduction from Slater’s investment when the option is
exercise.