Chapter 9
Problem I 1. Jollibee has substantially performed all material services, the refund period has expired, and the collectibility of the note is reasonably assured. Jollibee recognizes revenue as follows: Cash……….. Notes receivable……………. Franchise revenue……………………..
240,000 600,000 840,000
2. The refund period has expired and the collectibility of the note is reasonably assured, but Jollibee has not substantially performed all material services. Jollibee does not recognize revenue, but instead recognizes a liability as follows: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..
240,000 600,000 840,000
Franchisor will recognize the unearned franchise fees as revenue when it has performed all material services, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….…….
840,000 840,000
3. Jollibee has substantially performed all services and the collectibility of the note is reasonably assured, but the refund period has not expired. Jollibee does not recognize revenue, but instead recognizes a liability as follows: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..
240,000 600,000 840,000
The franchisor will recognize the unearned franchise fees as revenue when the refund period expires, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….……………………………….. 4.
840,000 840,000
Jollibee has substantially performed all services and the refund period has expired, but the collectibility of the note is not reasonably assured. Jollibee recognizes revenue by the installment or cost recovery method. If we assume that Jollibee uses the installment method, it recognizes revenue of P240,000 as follows: Cash……….. Notes receivable……………. Franchise revenue…………………….. Unearned franchise revenue……………
240,000 600,000 240,000 600,000
The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of franchise, the entry would be as follows: Unearned franchise revenue…………… Franchise revenue……………………..
120,000 120,000
This revenue recognition may be true only in the event there is no cost of franchise at all. On the other hand, it may be somewhat misleading since under the installment sales method; gross profit is earned or realized thru collections. 5. The refund period has expired, but Jollibee has not substantially performed all services and there is no basis for estimating the collectibility of the note. Jollibee does not recognize the note as an asset. Instead, it uses a form ·of the deposit method. For example, suppose Jollibee has developed an entirely new product whose success is uncertain and the franchisee will pay the note from the cash flows from the sale of the product, if any. Jollibee records the initial transaction as
follows: Cash……….. Unearned franchise revenue……………………..
240,000 240,000
The franchisor may recognize the unearned franchise fees as revenue under the accrual method in the normal manner at the completion of the services to be performed (if collectibility is reasonably assured), the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….………………………………..
240,000 240,000
Alternatively, it may recognize revenue under the installment method if it has no basis for estimating the collectibility of the note. 6.
Now assume that Jollibee has earned only P360,000 from providing initial services, with the balance being a down payment for continuing services. If the refund period has expired and the collectibility of the note is reasonably assured, Jollibee recognizes revenue of P360,000 as follows: Cash……….. 240,000 Notes receivable……………. 600,000 Franchise revenue…………………….. 360,000 Unearned franchise revenue………….. 480,000 The franchisor recognizes the unearned franchise revenue of P480,000 as revenue when it performs the continuing services, the adjusting entry to record the revenue then would be: Unearned franchise revenue……………………... Franchise revenue….………………………………..
480,000 480,000
In all these cases except the fifth, the franchisor accounts for the collection of interest and principal on the note receivable in the usual manner. In the fifth situation, it does not recognize the note and revenue until a future event occurs. In addition, the franchisor accounts for its costs in the same way as its revenue recognition. That is, if it defers revenue, then it defers the related cost of goods sold. Then, when it recognizes revenue, it matches the cost of goods sold against the revenues. The franchisee accounts for its payments as an intangible asset. Sometimes the franchisor collects the initial franchise fee far in advance of performing its services. At other times collection of part of the initial franchise fee is deferred until the franchise is operating successfully. Problem II
1.
Cash .........................................
75,000
Unearned Franchise Fee .....................
75,000
2. Cash ......................................... Note Receivable .............................. Unearned I.I. or Discount on Note Receivable Revenue from Franchise Fee ................. [P{75,000 + (P30,000 x 3.0373)] = P116,119 (Table IV n = 4, i = 12%)
75,000 120,000
Cash ......................................... Note Receivable .............................. Unearned I.I. or Discount on Note Receivable Revenue from Franchise Fee ................. Unearned Franchise Fee .....................
75,000 120,000
28,881 166,119
3. 28,881 75,000 91,119
Problem III 1. If there is a reasonable expectation that the down payment may be refunded and substantial future services remain to be performed by Pizza, Inc., the entry should be:
Cash………………………………………………………………………….. Notes receivable…………………………………………………………..
120,000.0 0 480,000.0 0
Unearned interest income (or Discount on notes receivable)... Unearned franchise revenue (P120,000 + P383,300.16) …………
96,699.84 503,300.1 6
2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be:
Cash……….. Notes receivable…………….
120,000.0 0 480,000.0 0
Unearned interest income (or Discount on notes receivable) Franchise revenue……………………..
3.
96,699.84 503,300.1 6
If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of services still to be performed by the franchisor in future periods, and collectibility of the note is reasonably assured, the entry should be:
Cash……….. Notes receivable…………….
120,000.0 0 480,000.0 0
Unearned interest income (or Discount on notes receivable) Franchise revenue……………………..
96,699.84 120,000.0 0 383,300.1 6
Unearned franchise revenue
4. If the initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be: Cash……….. Franchise revenue……………………..
120,000. 00 120,000.0
0
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by means of cash collection using the cost recovery method. 5.
If the initial down payment is refundable or substantial services are yet to be performed, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be:
Cash……….. Unearned franchise revenue……………………..
120,000 120,000
Where the collection of the note is extremely uncertain, revenue thru gross profit is recognized by means of cash collection using the cost recovery method. Problem IV 1. If the down payment is refundable, and no services have been rendered at the time the arrangement is made, and collection on the note is reasonably certain, the entry should be: Cash……….. Notes receivable…………….
120,000. 00 180,000. 00
Unearned interest income (or Discount on notes receivable) Unearned franchise revenue……………………..
2.
37,354.50 262,645.5 0
Initial services are determined to be substantially performed, the refund period has expired and the collection of the note is reasonably assured, the full accrual method would be used. Assume that substantial performance of the initial services costs P52,529.1 the entry should be: Cash……….. Notes receivable…………….
120,000. 00 180,000. 00
Unearned interest income (or Discount on notes receivable) Franchise revenue……………………..
Cost of franchise revenue
37,354.50 262,645.5 0 52,529.1 0
Cash, etc……………
52,529.10
Few months after, the collectibility of the note becomes doubtful or no reasonable assurance, the installment sales method could be used as a general rule. In addition to the entries above, following entries would be required: a. To set-up cost of franchise: No entry required, already set-up previously. b. To defer gross profit on franchise: Franchise revenue Cost of franchise revenue Deferred gross profit on franchise
262,645. 50 52,529.10 210,116.4 0
c. Adjustments to recognize gross profit on franchise: Deferred gross profit on franchise
96,000.0 0
Realized gross profit on franchise
96,000.00
Franchise revenue……….. Less: Cost of franchise revenue Gross profit……….. Gross profit rate (210,116.4/262,645.5)
262,645.5 52,529.1 210,116.4 80%
Collections as to principal…….
P120,000. 00 80 % P 96,000.00
Multiplied by: Gross profit rate……. Realized gross profit on franchise…..
Problem V If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and the permits on February 1, 20x5, and operations commence at that time, the following journal entries would be appropriate: July 1, 20x3: Cash……….. Notes receivable……………. Unearned franchise revenue……………………..
120,000 480,000 600,000
Deferral of revenue recognition is required when “substantial performance" of franchisor services has not been completed. It would call for deferral of revenue recognition until evidence of service performance was available. The best evidence, of course, would be the commencement of operations of the franchise outlet and at this point in time, revenue is recognized. During 20x3: Deferred cost of franchise revenue…. Cash…………..………..
360,000 360,000
December 31, 20x3: Interest receivable (P480,000 x 14% x 6/12)………….. Cash…………..………..
33,600 33,600
February 1, 20x4: Unearned franchise revenue…………………….. Franchise revenue……………………..
600,000 600,000
Cost of franchise revenue…………………….. Deferred cost of franchise revenue……………………..
360,000 360,000
Problem VI Reasonably Assured January 1, 20x4 Cash………….. Notes receivable……. Unearned franchise revenue……. Receipt of initial franchise fee.
1,500,000 4,500,000
No reasonable assurance 1,500,000 4,500,000
6,000,000
6,000,000
Conditions to be met: Services Period of refund Collectibility 1/1/20x4 Balance Status December 31, 20x4 Cash………….. Notes receivable……. Interest income (P3,750,000 x 10%)
Cash No Yes
1,500,000 Liability
Notes No Yes Reasonably assured 4,500,000 Liability
1,575,000
Cash No Yes
1,500,000 Liability
Notes No Yes No reasonable assurance 4,500,000 Liability
1,575,000 1,125,000 450,000
1,125,500 450,000
Annual collection.
Deferred cost of franchise Cash…………………
1,800,000
1,800,000 1,800,000
1,800,000
To defer cost of franchise since substantial services had not been performed.
Operating expenses Cash…………………
120,000
120,000 120,000
120,000
To record expenses.
Adjustments: Cost of franchise Deferred cost of franchise
1,800,000 1,800,000
To recognize cost of franchise.
Unearned franchise revenue……. Franchise revenue
6,000,000 6,000,000
To recognize franchise revenue based on the following analysis:
Conditions to be met:
Cash
Notes
Services
Yes
Yes
Period of refund
Yes
Yes Reasonably assured
1/1/20x4 Balance………………….. 12/31/20x4: Collection as to principal
1,500,000 1,125,0 00
4,500,000 (1,125,000 )
12/31/20x4 Balance
2,625,000
2,625,000
Revenue
Revenue
Collectibility
Status Adjustments (Installment sales method) a. To set-up cost of franchise: No entry* b. To set-up deferred gross profit Unearned franchise revenue Deferred cost of franchise revenue
6,000,000 1,800,000
Deferred gross profit
4,200,000
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-6 for alternative treatment to set-up cost of franchise. Conditions to be met: Services Period of refund
Cash Yes Yes
Collectibility 1/1/20x4 Balance…………………..
1,500,000 1,125,00 0 2,625,000 Revenue – I/S Method
12/31/20x4: Collection as to principal 12/31/20x4 Balance Status c. To recognize realized gross profit on franchise: Deferred gross profit Realized gross profit on franchise
Notes Yes Yes No reasonabe assurance 4,500,000 (1,125,000 ) 2,625,000 Liability
1,837,500 1,837,500
Collections – principal x gross profit rate P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500
2. Reasonably Assured Income Statement, 12/31/20x4: Franchise revenue (accrual method)* Less: Cost of franchise (accrual method)* Gross profit on regular franchise (accrual)* Add: Gross profit on franchise (installment sales method) Gross profit on franchise Less: Operating expenses Add: Interest income…………….. Net income…………….
No reasonable assurance
P6,000,000 1,800,00 0
P
0
P4,200,000
P
-0 P4,200,000 120,000 P4,080,000 450,000 P4,530,000
*1,837,500 P1,837,500 120,000 P1,717,500 450,000 P2,167,500
0 0
Problem VII
1.
Reasonably Assured January 1, 20x4 Cash………….. Notes receivable……. Unearned interest income* Unearned franchise revenue…….
1,440,000 3,840,000
No reasonable assurance 1,440,000 3,840,000
796,896 4,483,104
796,896 4,483,104
Receipt of initial franchise fee.
Conditions to be met: Services** Period of refund – until date of Opening
Cash No
Notes (PV) No
Cash No
Notes (PV) No
No
No
No
No
Reasonably assured Collectibility 1/1/20x4 Balance Status
1,440,000 Liability
3,043,104* ** Liability
1,440,000 Liability
No reasonable assurance 3,043,104* ** Liability
*Unearned interest income or discount on notes receivable: P3,840,000 – P3,043,104 = P796,896. * *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred and subsequent direct cost of franchise should also be deferred. ***P960,000 x 3.1699 = P2,535,920
February 2, 20x4: Deferred cost of franchise Cash…………………
144,931.2 0
144,931.2 0 144,931.20
144,931.20
To defer cost of franchise since substantial services had not been performed.
June 13, 20x4: General expenses Cash…………………
60,000
60,000 60,000
60,000
To record expenses.
August 8, 20x4: Deferred cost of franchise Cash…………………
360,000
360,000 360,000
360,000
To defer cost of franchise since substantial services had not been performed.
November 2, 20x4: Deferred cost of franchise Cash…………………
840,000
840,000 840,000
840,000
To defer cost of franchise since substantial services had not been performed.
November 2, 20x4: Substantial completion of services. December 31, 20x4: Cash………….. Notes receivable…………………
960,000
960,000 960,000
960,000
Annual collections.
Adjustments: Unearned interest income Interest income To recognize interest income thru amortization as follows: 10% x P3,043,104 = P304,310.4. Cost of franchise
304,310. 40
304,310.40 304,310.40
1,344,931. 20 1,344,931.2 0
Deferred cost of franchise To recognize cost of franchise.
Unearned franchise revenue……. Franchise revenue
4,438,1040 4,438,1040
304,310.4 0
To recognize franchise revenue based on the following analysis:
Conditions to be met: Services** Period of refund – outlet already opened.
Cash
Notes (PV)
Yes
Yes
Yes
Yes Reasonably assured 4,438,104
Collectibility 1/1/20x4 Balance
1,440,000
12/31/20x4: Collection……………..... . P960,000 Less: Interest collection… 304,310.40
Collection –
Principal…….P655,689.60
Status
655,689.6 0
( 655,689.60 )
2,095,689. 60
2,387,414.4 0
Revenue
Revenue
Adjustments (Installment sales method) a. To set-up cost of franchise: Cost of franchise revenue….. Deferred cost of franchise revenue b. To set-up deferred gross profit: Unearned franchise revenue
1,344,931. 20 1,344,931. 20
3,483,104 1,344,931. 20 2,138,172. 80
Cost of franchise revenue Deferred gross profit
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to Illustration 9-5 for alternative treatment to set-up cost of franchise.
Conditions to be met: Services** Period of refund – outlet already opened. Collectibility 1/1/20x4 Balance 12/31/20x4: Collection……………..... . P960,000 Less: Interest collection… 304,310.40 Collection – Principal…….P655,689.60
Cash Yes
Notes (PV) Yes
Yes
Yes No reasonable assurance 304,104
1,440,000
655,689.6 0 2,095,689.6 0
( 655,689.60 ) 2,387,414.4
Status
Revenue – I/S Method
c. To recognize realized gross profit on franchise: Deferred gross profit
Liability
1,466,983.20 1,466,983. 20
Realized gross profit on franchise
2.
Collections – principal x gross profit rate P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20
No reasonable assurance
Reasonably Assured Income Statement, 12/31/20x4: P 4,471,1040
Franchise revenue (accrual method)* Less: Cost of franchise (accrual method)* Gross profit on regular franchise (accrual)* Add: Gross profit on franchise (installment sales method)
P
1,344,931.2 0
0
P3,138,172.8
P
P3,138,172.8 60,000 P3,078,172.8
Add: Interest income……………..
304,310.40 P3,382,483.2 0
Net income…………….
0
*1,466,983.2 0 P1,466,983.2 0 60,000 P1,406,983.2 0 304,310.4 0 P1,771,293. 60
-0-
Gross profit on franchise Less: Operating expenses
0
*Note: This item represents regular franchise sales-type transaction. If the collectibility of the fee (note receivable) is reasonably assured, the permissible method to be applied should be the accrual method. It should be observed that in the event, there is cost of franchise and the installment sales method is used, the concept of revenue recognition does literally apply to franchise revenue but to the recognition of realized gross profit on franchise thru collections as to principal multiplied by gross profit rate.
Alternatively, computation of interest and principal collections are as follows: Date
Collection
1/03/20x4 1/03/20x4 12/31/20x4 Total
1,440,000 960,000 2,400,000
Interest (10% of Unpaid Balance) -0304,310.40 304,310.40
Principal
1,440,000 655,689.60 2,095,689.60
Unpaid Balance 4,483,104 3,043,104 2,387,414.40
Problem VIII
1. The fee is earned for providing continuing services: Cash or Accounts receivable………… Franchise revenue – continuing franchise fee
2. If P10,000 of the fee is for national advertising:
108,000 108,000
Cash or Accounts receivable………… Franchise revenue – continuing franchise fee Unearned franchise revenue – continuing franchise fee……
108,000 96,000 12,000
The franchisor recognizes the unearned franchise fees as revenue when it performs the advertising services and also records the costs as expenses, the entries should be: Advertising expenses………… Cash, etc……………….. Unearned franchise revenue – continuing franchise fee…… Franchise revenue – continuing franchise fee
xxx xxx 12,000 12,000
Problem IX – PFRS 15
Correction: Additional data: The franchisor should: Identify the performance obligations and the point in time when the performance obligations are satisfied and revenue is recognized. Consider the following for allocation of the transaction price at December 31, 20x7. Rights to the trade name, market area, technical and proprietary knowhow. Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Machinery and equipments, etc. (costing, P285,000). . . . . . . . . . . . . . . . . . . . . . . Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 570,000.00 283,774.50 __399,000.0 0 P1,252.774. 50
The entries for the above transactions are as follows:
December 31, 20x7 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... Unearned interest income (or Discount on notes receivable) . . Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned service revenue – training, etc. . . . . . . . . . . . . . . . .... Unearned sales revenue – machinery and equipments, etc. . .. *discrepancy of P22.80. February 28, 20x8 Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... Franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned service revenue – training, etc. . . . . . . . . . . . . . . . . . . . . . Service revenue – training, etc. Unearned sales revenue – machinery and equipment, etc.. . . . . .. Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
570,000. 00 855,000. 00 *172,225. 50 570,000,0 0 283,774.5 0 399,000.0 0
570,000. 00 570,000.0 0 283,774. 50 283,774.5 0 399,000. 00 399,000.0 0
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......
285,000. 00 285,000.0 0
Problem X
March 20: Cash Notes receivable Unearned franchise fee
5,000 20,000 25,000
June 15: Unearned franchise revenue Franchise revenue
25,000 25,000
July 15: Cash Service revenue
500 500
Problem XI Cash or Accounts receivable… Franchise revenue – supplies sales…………….. Cost of franchise – supplies sales……… Supplies inventory……….
117,600 117,600 90,000 90,000
Problem XII Cash……………. Notes receivable (P108,000 – P21,600) Unearned interest income (P86,400 – P69,978) Franchise revenue (P21,600 + 69,978 – P4,800*) Unearned franchise revenue – equipment sale*
21,600 86,400 16,422 86,778 4,800
All the criteria to recognize initial franchise fee as revenue was met, except that an amount of P4,800 equivalent to indicated profit (P24,000, selling price less P19,200 option price) will be deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows: Cash or Accounts receivable… Unearned franchise revenue – equipment sale Franchise revenue – equipment sale…………….. Cost of franchise - equipment sale………. Equipment inventory……….
19,200 4,800 24,000 19,200 19,200
Problem XIII April 1, 20x4: Cash……………. Notes receivable………… Franchise revenue (P21,600 + P86,400 – P4,800*) December 31, 20x4: Franchise revenue – initial franchise fee Interest income (P192,000 x 8% x 9/12) Cash (P153,600 – P11,520)…………. Notes receivable…………… Gain or revenue from repossessed franchise……………
288,000 192,000 480,000
480,000 11,520 142,080 192,000 134,400
Problem XIV Cash Notes receivable………… Deferred franchise purchase option liability…….
72,000 360,000 432,000
Deferred cost of franchise revenue/Investment in Franchisee Cash, etc………
xxx xxx
Deferred franchise purchase option liability………………………. Deferred cost of franchise revenue/Investment in Franchisee Gain on option to exercise to purchase the franchise outlet………
432,000 xxx 432,000
Multiple Choice Problems 1. a – following conditions should be observed to recognize revenue: Services – none Period of Refund – expired Collectibility of the note – reasonably assured There was failure on one condition; therefore, no revenue should be recognized. 2. d – following conditions should be observed to recognize revenue: Services Performed – yes Period of Refund – not expired / still refundable Collectibility of the note – reasonably assured There was failure on one condition; therefore, no revenue should be recognized. 3. a - following conditions should be observed to recognize revenue: Services Performed – none Period of Refund – expired Collectibility of the note – very uncertain or extremely uncertain. There was failure on one condition; therefore, no revenue should be recognized. Since, the collectibility of the note is extremely uncertain recognition of the note as an asset in unwarranted (or should not be recorded). 4.
d – the problem already indicated that P300,000 is earned, therefore the remaining balance of P400,000 (P700,000 – P300,000 is considered as unearned revenue.
5. a Cash Notes receivable Unearned franchise fee
6,000 30,000
Unearned franchise fee Franchise fee revenue
36,000
Cash Notes receivable Franchise fee revenue
6,000 30,000
36,000
6. b 36,000
7. a
8.
36,000
d – the franchise fee revenue should be zero, since no substantial performance of services had been performed (and the down payment is still refundable). 9. b
In this problem, since there is doubtful of collection, it is safely assumed to used installment method. Therefore, the realized gross profit would be: Collections in 20x4……………………………………………………………..P 200,000 x: Gross profit rate [100% - (P150,000/P500,000)]…………………………. 70% Realized gross profit in 20x4…………………………………………………. P 140,000 Revenue Analysis: Cash N/R Services Yes Yes Period of Refund Yes Yes Collectibility No Reas. Assured 200,000 300,000 Status Rev – I/S Method Liability 10. d In this problem, full accrual method is used to recognized the initial franchise fee of Initial Franchise Fee: Cash Notes Receivable Services Yes Yes Period of Refund Yes Yes Collectibility Reasonably Assured P20,000 P80,000 Status Revenue Revenue Substantial performance of services has been rendered because commencement of operations by the franchisee shall be presumed to be the earliest point of which substantial performance has occurred, unless it can be demonstrated that substantial performance of all obligations, including services rendered voluntarily, has occurred before that time. Period of refunding the initial franchise fee and collectibility of the notes is not anymore a problem (they depend on the profitability of its first year of operations) because the result of operations in the first year is profitable. Therefore, the initial franchise fee of P100,000 (P20,000 + P P80,000) is considered as revenue, and a continuing franchise fee of P5,000 (1% x P500,000) should be also be recognized as revenue – continuing fanchise. Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus P5,000 continuing). 11. a Initial franchisee revenue (since all services had been performed and assumed that period of refunding already expired)………………………….. P100,000 Add: Continuing franchise revenue (5% x P800,000)…………………………………… 40,000 Total Revenue from franchise………………………………………………………………. P 140,000 12. d There is already substantial performance of services rendered since, the franchise outlet started operations and it is assumed that period of refund has expired. The continuing franchise fee is recognized also as revenue since it is earned at the time it was received. The net income would be: Franchise Revenue:
Initial Franchise Fee: Down payment…………………………………………… P 30,000 PV of installment (P10,000 x 1.7355)……………………. 17,355 P47,355 Continuing Franchise Fee (5% x P500,000) 25,000 Total Franchise Revenue………………………………………………………………… P72,355 Add: Interest Income (10% x P17,355)………………………………………………… 1,735 Total Revenue/Net Income……………………………………………………………… P74,090 13. a All conditions that initial franchise fee be recognized as revenue had been met as follows:
Revenue Analysis for IFF Services Period of Refund (note) Collectibility Status
Cash Yes Yes
N/R Yes Yes
200,000 Revenue
Reas. Assured 300,000 Revenue
The Net Income then would be as follows: Franchise Revenue………………………………………………………………..P 500,000 Less: Cost of Franchise…………………………………………………………… 150,000 Net Income…………………………………………………………………………P 350,000 14. d In this problem, full accrual method is used to recognized the initial franchise fee of P100,000 analyze as follows:
Revenue Analysis for IFF Services Period of Refund (note) Collectibility
Cash Yes Yes
N/R Yes Yes
Reas. Assured 20,000 80,000 Status Revenue Revenue Note: Period of refunding the initial franchise fee was presumed to have been expired since the business operates profitably in its first year of operation. Continuing Franchise Fee: Considered revenue the moment continuing services had been rendered amounted to P5,000 (1% x P500,000).
15. d
Initial Franchise Fee…………………………………………………………P 100,000 Continuing franchise fee…………………………………………………. 5,000 Total…………………………………………………………………………… P 105,000 Less: Indirect cost of franchise…………………………………………… 15,000 Net income……………………………………………………………………P 90,000 Revenue = P400,000 Interest income = P160,000 ×8% ×9/12 = P9,600
Cash = P128,000 – P9,600 = P118,400 Repossession revenue: P240,000 – P128,000 = P112,000. 16. c Cash = P560,000 + P48,000 = P608,000 Franchise Fee Revenue = P560,000 Unearned Franchise Fees = P48,000 ×20% = P9,600 Revenue from Continuing Franchise Fees = P48,000 – P9,600 = P38,400. 17. b - P200,000 + P545,872 – P24,000 = P721,872. 18. b
Franchisee frequently purchases all of the equipment, products, and supplies from the franchisor. The franchisor would account for these sales as if, it would be a product sales. Sometimes, however, the franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies after the initial franchise fee is paid. If the bargain price is lower that the normal selling price of the same product or it does not provide the franchisor the reasonable profit, then, a portion of the initial franchise fee should be deferred. The deferred portion would be accounted for as adjustment of the selling price when the franchisee subsequently purchases the equipment or supplies. Therefore, the amount of revenue would be P90,234 computed as follows: Cash Notes Receivable Services Yes Yes Period of Refund Yes Yes Collectibility Reasonably Assured P25,000 P68,234 Status Revenue Revenue except P3,000 reasonable profit on sale of equipment The revenue from franchise would be: Cash……………………………………………………………………………………………… P 25,000 PV of Note…………………………………………………………………………..P68,234 Less: Reasonable profit on sale of Equipment P15,000 – P12,000)………………………………………….… 3,000 65,234 P 90,234 Incidentally, the entries would be: Upon receipt of IFF: Cash………………………………………………………………………… 25,000 Notes Receivable………………………………………………………… 90,000 Unearned Interest Income (P90,000 – P68,234)…………. 21,766 Franchise Revenue……………………………………………. 90,234 Unearned Franchise Revenue………………………………. 3,000 If equipment was sold: Cash or Accounts Receivable………………………………………… 12,000 Unearned Franchise Revenue………………………………………… 3,000 Franchise Revenue – Equipment…………………………… 15,000 Cost of Sales – equipment……………………………………………… 12,000 Equipment Inventory………………………………………….. 12,000
19. d Total fee Discount
P800,000 P 640,000 (507,200)
Bargain purchase Advertising (P1,000 × 60) Cash....................................................................................... Notes Receivable....................................................................
160,000 640,000
(132,800) (10,000) (60,000) P 597,200
Discount on Notes Receivable /Unearned Int. Income Revenue from Franchise Fees ..................................... Unearned Franchise Fees ............................................ Or alternatively, Cash....................................................................................... Notes Receivable (at present value or net). . .…………. Revenue from Franchise Fees ..................................... Unearned Franchise Fees ............................................
132,800 597,200 70,000 160,000 507,200 597,200 70,000
20 and 21. No requirement 22. c – refer to No. 19 23. c – refer to No. 19 24. b Services Period of Refund Collectibility
Cash No No P25,000
Status
Liability
Notes Receivable No No Reasonably Assured PV - P39,623 FV – P50,000 UII/Disct. P10,377 Liability
25. d 26. d Franchisee A: The circumstances imply that full accrual method could be used. Franchise Revenue…………………………………………..……………..P 17,890* Less: Franchise Cost……………………………………………………….. 7,000 Gross Profit……………………………………………………………………P 10,890 Add: Interest Income (P10,890 x 4%)……………………………………. 436 Net Income…………………………………………………………………..P 11,326 *Initial deposit…………………………………………….P 7,000 Add: PV of four payments (P3,000 x 3.6299)……… 10,890 P17,890 27. b – refer to No. 26 28. a – strictly speaking, the franchise revenue means only arising from the franchise itself meaning coming from the franchise fee. In certain cases, the franchise revenue may construe to be all income arising from franchise transaction including interest. Franchisee B: Because of the doubtful of collection and only partial completion, the deposit method (unearned franchise revenue) should be used. No revenue or income would be recognized in 20x4 from the franchise fee. However, because the first payment of P3,000 was made, interest income of P436 would be recognized. 29. No answer available – it should be P436 the interest income (P10,890 x 4%). Refer to No. 28 for discussion.
30. a – strictly speaking, the franchise revenue means only arising from the franchise itself meaning coming from the franchise fee. In certain cases, the term “franchise revenue” may construe to be all income arising from franchise transaction including interest. Franchisee C: Because of the doubtful collection but substantial completion, either the installment sales or cost recovery method could be used. If the installment sales method is used, gross profit of P4,218* would be recognized in 20x4 plus interest income of P436. * Franchise Revenue………………………………………………………………P 17,890 Less: Franchise Cost……………………………………………………………… 10,000 Gross Profit………………………………………………………………………....P 7,890 Gross profit percentage: P7,890 / P17,890………………………………….. 44.10% Collections in 2007: Initial Deposit…………………………………………………………… P 7,000 Collections – Principal: First Installment…………………………………….. P 3,000 Less: Interest……………………………………….. 436 2,564 Collections – Principal………………………………………………… P 9,564 Multiplied by: Gross profit percentage……………………………. 44.10% Recognized Gross Profit – 2001……………………………………… P 4,218 Add: Interest Income………………………………………………….. 436 Net Income……………………………………………………………….P 4,654 If the cost recovery method is used, no revenue or income would be recognized, because the P10,000 collections are exactly offset by the P10,000 costs. 31. c – refer to No. 30 for computation. 32. d - Recognition of Franchise Rights Revenue Over Time Depending on the economic substance of the rights, the franchisor may be providing access to the right rather than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a point in time (November 1, 20x7), therefore, the P40,000 is unearned franchise revenue while training (as service) and equipment (sales of equipment) are separately classified but not as an unearned franchise revenue (in contrast to PAS 18) 33. a -Recognition of Franchise Rights Revenue Over Time Depending on the economic substance of the rights, the franchisor may be providing access to the right rather than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a point in time (August 1, 20x8), therefore, the P11,500 is unearned service revenue (note: not as a unearned franchise revenue in contrast to PAS 18)
THEORIES 1 . 2 . 3 . 4 . 5 .
True
6.
True
False
7.
True
False
8.
True
False
9.
a
True
