Professional Documents
Culture Documents
Chapter 9
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.. 240,000
Notes receivable. 600,000
Franchise revenue.. 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.. 240,000
Notes receivable. 600,000
Unearned franchise revenue.. 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:
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.. 240,000
Notes receivable. 600,000
Unearned franchise revenue.. 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:
4. 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.. 240,000
Notes receivable. 600,000
Franchise revenue.. 240,000
Unearned franchise revenue 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 120,000
Franchise revenue.. 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.. 240,000
Unearned franchise revenue.. 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:
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
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 ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 166,119
[P{75,000 + (P30,000 x 3.0373)] = P116,119
(Table IV n = 4, i = 12%)
3.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 75,000
Unearned Franchise Fee ..................... 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.. 120,000.0
0
Notes receivable. 480,000.0
0
Unearned interest income (or Discount on notes 80,583.20
receivable)
Unearned franchise revenue.. 419,416,8
0
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.. 120,000.0
0
Notes receivable. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue.. 503,300.1
6
3. 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.. 120,000.0
0
Notes receivable. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue.. 120,000.0
0
Unearned franchise revenue 383,300.1
6
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.. 120,000.
00
Franchise revenue.. 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.. 120,000
Unearned franchise revenue.. 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.. 120,000.
00
Notes receivable. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Unearned franchise revenue.. 262,645.5
0
2. 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.. 120,000.
00
Notes receivable. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Franchise revenue.. 262,645.5
0
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.. 120,000
Notes receivable. 480,000
Unearned franchise revenue.. 600,000
During 20x3:
Deferred cost of franchise revenue. 360,000
Cash.... 360,000
February 1, 20x4:
Unearned franchise revenue.. 600,000
Franchise revenue.. 600,000
Problem VI
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash.. 1,500,000 1,500,000
Notes receivable. 4,500,000 4,500,000
Unearned franchise revenue. 6,000,000 6,000,000
Receipt of initial franchise fee.
Adjustments:
Cost of franchise 1,800,000
Deferred cost of franchise 1,800,000
To recognize cost of franchise.
2.
No reasonable
Reasonably Assured assurance
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)* P6,000,000 P 0
Less: Cost of franchise (accrual 1,800,00
method)* 0 0
Gross profit on regular franchise
(accrual)* P4,200,000 P 0
Add: Gross profit on franchise
(installment -0
sales method) - *1,837,500
Gross profit on franchise P4,200,000 P1,837,500
Less: Operating expenses 120,000 120,000
P4,080,000 P1,717,500
Add: Interest income.. 450,000 450,000
Net income. P4,530,000 P2,167,500
Problem VII
1.
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash.. 1,440,000 1,440,000
Notes receivable. 3,840,000 3,840,000
Unearned interest income* 796,896 796,896
Unearned franchise revenue. 4,483,104 4,483,104
Receipt of initial franchise fee.
February 2, 20x4:
144,931.2 144,931.2
Deferred cost of franchise 0 0
Cash 144,931.20 144,931.20
To defer cost of franchise since substantial
services had not been performed.
August 8, 20x4:
Deferred cost of franchise 360,000 360,000
Cash 360,000 360,000
To defer cost of franchise since substantial
services had not been performed.
November 2, 20x4:
Deferred cost of franchise 840,000 840,000
Cash 840,000 840,000
To defer cost of franchise since substantial
services had not been performed.
November 2, 20x4:
Substantial completion of services.
Adjustments:
304,310.
Unearned interest income 304,310.40 40
304,310.4
Interest income 304,310.40 0
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.
1,344,931.
Cost of franchise 20
1,344,931.2
Deferred cost of franchise 0
To recognize cost of franchise.
12/31/20x4:
Collection..... .
P960,000
Less: Interest collection ( 655,689.60
304,310.40 )
Collection 655,689.6
Principal.P655,689.60 0
2,095,689. 2,387,414.4
60 0
Collection..... . P960,000
Less: Interest collection 304,310.40 655,689.6 ( 655,689.60
Collection Principal.P655,689.60 0 )
2,095,689.6 2,387,414.4
0
Status Revenue Liability
I/S Method
*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.
Problem VIII
1. The fee is earned for providing continuing services:
Cash or Accounts receivable 108,000
Franchise revenue continuing franchise fee 108,000
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:
Problem IX
March 20:
Cash 5,000
Notes receivable 20,000
Unearned franchise fee 25,000
June 15:
Unearned franchise revenue 25,000
Franchise revenue 25,000
July 15:
Cash 500
Service revenue 500
Problem X
Cash or Accounts receivable 117,600
Franchise revenue supplies sales.. 117,600
Problem XI
Cash. 21,600
Notes receivable (P108,000 P21,600) 86,400
Unearned interest income (P86,400 P69,978) 16,422
Franchise revenue (P21,600 + 69,978 P4,800*) 86,778
Unearned franchise revenue equipment sale* 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 19,200
Unearned franchise revenue equipment sale 4,800
Franchise revenue equipment sale.. 24,000
Problem XII
April 1, 20x4:
Cash. 288,000
Notes receivable 192,000
Franchise revenue (P21,600 + P86,400 P4,800*) 480,000
Problem XIII
Cash 72,000
Notes receivable 360,000
Deferred franchise purchase option liability. 432,000
Investment.. 120,000
Deferred franchise purchase option liability. 432,000
Deferred cost of franchise revenue 288,000
Cash, etc 264,000
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 6,000
Notes receivable 30,000
Unearned franchise fee 36,000
6. b
Unearned franchise fee 36,000
Franchise fee revenue 36,000
7. a
Cash 6,000
Notes receivable 30,000
Franchise fee revenue 36,000
8. b
9. b
10. d
11. d the franchise fee revenue should be zero, since no substantial performance of
services had been performed (and the down payment is still refundable).
12. 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
13. 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
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).
14. 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. P140,000
15. 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.
16. a
All conditions that initial franchise fee be recognized as revenue had been met as
follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
200,000 300,000
Status Revenue Revenue
The Net Income then would be as follows:
Franchise Revenue..P 500,000
Less: Cost of Franchise 150,000
Net IncomeP 350,000
17. 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
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility 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).
18. d
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.
19. 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.
21. 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:
Theories
1 True 6. True 11. a
.
2 False 7. True 12. b
.
3 False 8. True 13. a
.
4 False 9. b 14. d
.
5 True 10 d 15,
. ,