2606 Franchise Accounting 1

FRANCHISES
SUGGESTED SOLUTIONS
STRAIGHT PROBLEMS and
MULTIPLE CHOICE
DE LEON/ DE LEON/ DE LEON

Parties to a franchise contract are (a) the franchisor
(owner) and (b) the franchisee (user). The franchisee
pays the franchisor 2 types of franchise fees:
1. Initial franchise fee – paid in consideration of the

right to use the franchisor’s name, products, and
processes, as well as for initial services to be
rendered by the franchisor; and
2. Continuing franchise fee – paid in consideration of

continuing services provided by the franchisor.
Substantial Performance
Is when the franchisor has no obligation to refund

any amounts already received nor intention to
forgive any amounts not yet collected AND that it
must have substantially performed the services
promised under the terms of the agreement
With Substantial Performance?
YES: Recognize Revenue NONE

Do not Recognize
Revenue
With Reasonable Without Reasonable Exemption:

Assurance of Collection Assurance of Collection DP 1. Non-refundable
2. Fairly represents
ACCRUAL METHOD INST. METHOD the services provided
RGP= Collection * GPR DP – earned
Recognize the entire
Note- uneraned
Revenue
REVENUE Int Bearing Note GPR: NIB Note

Contract Price Revenue
DP + PV of Note
(Cost)
Int Bearing NIB Note GP / Revenue
Note CP- UI DP + Inst Pymt DP +(Inst Pymt –
Collection
Contract DP + PV of Discount)
Price Note
DP + FA of Int= FA of Note * IR Disc= PV of Note
Note * DR
Exercise 1
(a) FA of Note 84,000

PV of Note (2.48685 x P28,000) 69,632
Discount/ Unearned Interest 14,368
Cash 56,000
Notes receivable 84,000
Discount on notes receivable 14,368
Revenue from franchise fees 125,632
(56,000 + 69,632= 125,632)
(b)
Cash 56,000
Unearned franchise fees 56,000
(c)
Cash 56,000
Notes receivable 84,000
Discount on notes receivable 14,368
Revenue from franchise fees 56,000
Unearned franchise fees 69,632
(P28,000 x 2.48685)

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
Exercise 2
a) Down payment made on January 1, 2018 P20,000.00
Present value of an ordinary annuity P16,000 *3.69590) 59,134.40
Total revenue (franchisor)/acquisition cost (franchisee) P79,134.40
b) Cash 20,000.00
Notes receivable 80,000.00
Discount on notes receivable 20,865.60
Unearned franchise fees 79134.40
FA of the Note 80,000.00

PV of the Note (P16,000 x 3.69590) 59,134.40
Discount on the Note 20,865.60
c) 1. P20,000 cash received from down payment . P 59,134.40
is recorded as unearned revenue from franchise fees.
2. P20,000 cash received from down payment.
3. None. (P20,000 is recorded as unearned revenue from

franchise fees.)

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
Problem 3: Note Receivable is interest-bearing.
DTD
Cash 4,687,500
Note receivable 3,125,000
DFR – IFF 7,812,500
Deferred Franchise cost 1,875,000

Cash 1,875,000
Cash 1,175,781.25
Note receivable 781,250
Interest revenue (P3,125,000 x 10%) 312,500
FR – CFF (1,640,625 x 5%) 82,031.25
YEA
Accrual Method
DFR – IFF 7,812,500

FR – IFF 7,812,500
Franchise Cost 1,875,000

Deferred Franchise cost 1,875,000
Therefore, RGP = P7,812,500 less P1,875,000 = P5,937,500

Installment Sales Method
FR – IFF 7,812,500
Franchise Cost 1,875,000
DGP – Franchises 5.937,500
DGP – Franchises 4,156,250

RGP 4,156,250
(P4,687,500 + P781,250) x 76% = P4,156,250


Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
Problem 4 – Note receivable is non-interest-bearing
Present Value Computations
FA (P 1,093,750 x 5) P 5,468,750
PV (P 1,093,750 x 2.990) 3,270,312.50
UI (Discount on NR) P 2,198,437.50
DTD
Cash 3,281,250
Discount on Note receivable 2,198,437.50
UFR – IFF 6,551,562.50
(3,281,250 + 3,270,312.50)
Deferred franchise cost 1,965,468.75

Cash 1,965,468.75
Expenses 46,875
Cash 46,875
Cash 21,875
FR – CFF (P437,500 x 5%) 21,875
Cash 1,093,750
Discount on Note receivable 654,062.50

Interest revenue 654,062.50
3,270,312.50 x 20% = 654,062.50

YEA
Accrual Method
UFR – IFF 6,551,562.50

FR – IFF 6,551,562.50
Franchise cost 1,965,468.75

Deferred franchise cost 1,965,468.75
Therefore, RGP: P6,551,562.50–P1,965,468.75=P4,586,093.75

Installment sales Method
FR - IFF 6,551,562.50
Franchise cost 1,965,468.75
DGP – Franchises 4,586,093.75
DGP – Franchises 2,604,656.25

RGP 2,604,656.25
[P3,281,250 + (P1,093,750 – P654,062.50)] x 70%

MULTIPLE CHOICE ITEMS
1. A
FR – IFF P 137,500
FR – CFF (P1,100,000 x 5%) 55,000
Total franchise revenue P192,500
2. D
No revenue shall be recognized for entities Yellow and Green since:

1. There is no substantial performance of initial services having
completed 25% and 10% for Yellow and Green, respectively.
2. Period of refund has not yet expired for both entities, thus
amount paid is still refundable.
Harrynawa Production can recognize revenues for Black and Beige

using ACCRUAL method since it is LIKELY that the balance will
be collected. Recognition is computed as followsas follows:
DP NOTE TOTAL
BLACK 125,000 750,000 875,000
BEIGE 125,000 750,000 875,000
Total revenue from initial franchise fee P 1,750,000

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
3. C
FR – IFF P 550,000
Interest revenue (P500,000 x 6%) 30,000
FR – CFF (P250,000 x 4%) 10,000
Franchise cost (325,000)
Expenses ( 31,250)
Net income P 233,750

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
4. B
FR – IFF (P50,000 + P380,000) P 430,000

Interest revenue (P380,000 x 6%) 22,800
FR - CFF (P250,000 X 4%) 10,000
Expenses (31,250)
Net income P106,550
DP 50,000
PV of the Note 125,000 x 3.04 380,000
Revenue to be recognized 430,000

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
5. D
FR – IFF (P984,375 + P2.531,250) P3,515,625
Less Franchise cost 1,125,000
DGP – Franchises P2,390,625
GPR (P2,390,625 / P3,515,625) 68%
RGP (P984,375 + P506,250) x 68% P 1,013,625

FR – CFF (P248,906 x 3%) 7,467
Interest revenue (P2,531,250 x 15%) 379,688
Expenses ( 225,000)
Net income P 1,175,780

Do not Recognize
Revenue

Note- uneraned
Revenue

DP + PV of Note
(Cost)
Collection
Price Note
Note * DR
DP P 1,000,000
PV (P375,000 x 3.04) 1,140,000
FR - IFF P 2,140,000
DGP - Franchises P 1,522,500
GPR (P1,522,500 / P2,140,000) 71.14%
6. D
Date Payment Discount Applied Balance

to Principal of Principal
Jan 2 1,140,000
Jun 30 375,000 136,800 238,200 901,800
Dec 31 375,000 108,216 266,784 635,016
RGP: (P1,000,000 + P238,200 + P266,784) x 71.14% P1,070,646

7. B
DP 2.5 M
PV OF NOTE 2.5M * 2.4 6.0 M
TOTAL REVENUE 8.5 M
(1) ACCRUAL METHOD

RGP= Revenue – cost
= 8.5M – 1,275,000
= 7,225,000
(2) INSTALLMENT METHOD

RGP= Collection x GPR
= ( DP + Inst Pymt – Discount) x GPR
= (2.5M + 2.5M – 1,440,000) x 85%
= P 3,026,000
GPR= 7,225,000/ 8.5M = 85%

Discount= PV of Note x DR= 6M x 24%= 1,440,000

2606 Franchise Accounting 1

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FRANCHISES

DE LEON/ DE LEON/ DE LEON

1. Initial franchise fee – paid in consideration of the

2. Continuing franchise fee – paid in consideration of

Is when the franchisor has no obligation to refund

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

(a) FA of Note 84,000

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

FA of the Note 80,000.00

2. P20,000 cash received from down payment.

3. None. (P20,000 is recorded as unearned revenue from

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

Deferred Franchise cost 1,875,000

DFR – IFF 7,812,500

Franchise Cost 1,875,000

Therefore, RGP = P7,812,500 less P1,875,000 = P5,937,500

DGP – Franchises 4,156,250

(P4,687,500 + P781,250) x 76% = P4,156,250

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

Present Value Computations

Deferred franchise cost 1,965,468.75

Discount on Note receivable 654,062.50

3,270,312.50 x 20% = 654,062.50

UFR – IFF 6,551,562.50

Franchise cost 1,965,468.75

Therefore, RGP: P6,551,562.50–P1,965,468.75=P4,586,093.75

DGP – Franchises 2,604,656.25

[P3,281,250 + (P1,093,750 – P654,062.50)] x 70%

No revenue shall be recognized for entities Yellow and Green since:

Harrynawa Production can recognize revenues for Black and Beige

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

FR – IFF (P50,000 + P380,000) P 430,000

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

RGP (P984,375 + P506,250) x 68% P 1,013,625

YES: Recognize Revenue NONE

With Reasonable Without Reasonable Exemption:

REVENUE Int Bearing Note GPR: NIB Note

Date Payment Discount Applied Balance

Jun 30 375,000 136,800 238,200 901,800

Dec 31 375,000 108,216 266,784 635,016

RGP: (P1,000,000 + P238,200 + P266,784) x 71.14% P1,070,646

(1) ACCRUAL METHOD

(2) INSTALLMENT METHOD

GPR= 7,225,000/ 8.5M = 85%

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