PROBLEMS ON FRANCHISE ACCOUNTING
Problem I
On December 31, 2020, Mack Do authorized to grant Michael & Company to operate as a franchisee for an
initial 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, 2021.
The present value on December 31, 2020 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 Mack Do; however, substantial future services are required of Mack do.
Collectability of the note is reasonably certain.
Mack Do's December 31, 2020 Balance Sheet, unearned franchise fees should be reported as
Problem II
December 31, 2020 The Fast Track, Inc. charges an initial franchise fee of P4,500,000 for the right to
operate as a franchise fee of Fast Track. Of this amount, 1,500,000 is collected. The balance is collectible
in four annual Installments of P1,000,000 each every December 31, starting 2021. The PV of 1 for 4 periods
at 10% is .6830 while the PV of an annuity of 1 for 4 periods at 10% is 3.1699.
January 2021 - The franchisor visited the proposed site and gave the go signal to start the construction
of the building
June 1, 2021
- Started training the manpower
July 1, 2021
- The franchise started its operation.
December 31, 2021
of P2,500,000.
- The first annual payment was received and the franchisee reported total sales
The franchisor incurred P250,000 in relation to this franchise. Other terms of the agreement include a
continuing royalty fee equal to 5% of annual gross sales.
1. The entry to record the above activity on December 31, 2020 was:
2. Assuming the initial down payment is not refundable, and the collectability of the note is assured, the
amount of revenue recognized on December 31, 2020 is:
3. The total revenue to be recognized by Fast Track, Inc on December 31, 2021 assuming the
collectability of the note is reasonably assured amounted to:
Problem III
Lighthouse Company sells a franchise that requires an initial franchise fee of P70,000. A down payment of
P20,000 cash is required with the balance covered by the issuance of a P50000, 10% notes payable by the
franchisee in five annual equal installments.
All the material services have been substantially performed by the franchisor, and the refund period has
expired, but the collectability of the note is not reasonably assured.
The (1) earned and (2) unearned franchise revenue at the opening of the outlet is
Problem IV
Henlin Food Inc. charges an initial franchise fee of P500,000 for the right to operate as a franchisee. Of
this amount, P100,000 is payable when the agreement was signed and the balance is a non-interest bearing
note in five annual payments of P80,000 each. In return for the initial franchise fee, the franchisor will help
locate the site, supervise the construction and training of store crews. The credit rating of the franchisee
indicates that the money can be borrowed at 8%. The present value of an ordinary annuity of five annual
receipts of P80.000 is P319,416.80. The discount represents the interest revenue to be accrued by the
franchisor over the payment period. The probability of refunding the initial fee is extremely low, the
franchisor had already performed substantial services as required by the contract, and collectability of the
note is reasonably assured.
1. The earned and unearned franchise fee would be
Problem V
On April 30, 2020, Sarah entered into a franchise contract with Popsters. The franchise agreement required
the franchisee, Popsters, to pay a nonrefundable upfront fee in the amount of P3,600,000 and on-going
payment of royalties equivalent to 8% of the sales of the franchisee. Popsters paid the non-refundable
upfront fee on April 30, 2020. In relation to the nonrefundable upfront fee, the franchise agreement
required Sarah to render the following performance obligations:
•
To construct the franchisee’s stall with stand-alone selling price of P600,000.
•
To supply cooking equipment. Price of competitors for the similar items cannot be determined since
the equipment are specialized in nature while the forecast of the expected cost of Sarah for the performance
obligation is P800,000 plus an appropriate margin above cost of 25%.
•
To deliver 5,000 units of raw materials to Popsters with stand-alone selling price of P900,000.
•
To allow Popsters to use the entity’s tradename for a period of 8 years starting on the inception
of the contract with stand-alone selling price of P1,500,000.
During the year 2020, Sarah’s remaining performance obligation is the delivery 1,000 units raw materials
to Popsters. For the year ended December 31, 2020, the franchisee reported sales revenue amounting to
P1,200,000. The entity had determined that the performance obligations are separate and distinct from
one another and accounted under PFRS 15.
1. Allocated nonrefundable upfront fee for the cooking equipment and trademark
2. Total revenue recognized by Sarah on 2020
Problem VI
On September 30, 2020, Heaven& Egg entered into franchise agreement with Manuel. The agreements
required an initial franchise fee of P175,000 plus four P75,000 payments due every three months, the first
payment due December 31, 2020 The interest rate is 12%. The initial deposit is no longer refundable if
services performed have been 25% completed. The following table describes the agreement.
Probability of Collection
Likely
Services Performed at 12/31/20
Substantially
Total Cost Incurred 12/31/20
35,000
The present value factors at 3% for four periods were as follows:
Present value of P1, - .0885
Present value of an annuity of P1, - 3.7171
The net total revenue to be recognized by Heaven & Egg in 2020 is