CPA REVIEW SCHOOL OF THE PHILIPPINES Manila Advanced Financial Accounting Guerrero/German/DeJesus/Lim/Ferrer/Laco/Valix FRANCHISE 1, Under PFRS 15, how shall revenue from contracts with customers such as revenue from initial franchise fee be recognized by the franchisor? Upon receipt of the initial franchise fee by the franchisor. Upon signing of the franchise agreement. When the franchisor satisfies the performance obligation under the franchise agreement. Applying the legality over the substance of the transaction. pomp Under PFRS 15, how may an entity satisfy a performance obligation in a contract with customers? Satisfaction of performance obligation over time. Satisfaction of performance obligation at a point in time. Either A or B. Neither A nor B. poOUP> 3. PFRS 15 provides that initial franchise fee shall be recognized as revenue over time (percentage of completion method) if any one of the following criteria provided below is met. Which of the following indicator shows that the initial franchise fee shall be recognized as revenue at a point in time instead over time? ‘A. When the franchisee simultaneously receives and consumes the benefits provided by the franchisor's performance as the franchisor performs. B. When the franchisor’s performance creates or enhances an asset that the franchisee controls as the asset is created or enhanced. C. When the franchisor’s performance does not create an asset with alternative use to the franchisor and the franchisor has an enforceable right to payment for performance completed to date D. When the franchisee has legal title to the franchise and has the significant risks and rewards of ownership of the franchise. 4, Under PFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or revenue for a sales-based royalty? A. When the sales of the franchisee occurs. B, When the performance obligation to which some or all of the contingent franchise fees or sales- based royalty has been satisfied or partially satisfied. C. When both A and B events occur. D. When either A or B event occurs. 5. What is the measurement of franchise revenue recognized from franchise agreement? Fair value of the consideration received or receivable. Book value of the consideration received or receivable, Carrying amount of the consideration received or receivable. Nominal amount of the consideration received or receivable. pOwPPage 2 Part IJ: Problem Solving 1, On January 1, 2020, MR. JOVEN entered into a franchise agreement with ONG to market their products, The agreement provides for an initial fee of P12,500,000 payable as follows; P3,500,000 to be paid upon signing of the contract and the balance in five equal annual payments every end of the year starting December 31, 2020. MR. JOVEN signs a non- interest bearing note for the balance. His credit rating indicates that he can borrow money at 15% interest for a loan of this tyPe- The present value of an annuity of Pl at 15% for 5 periods is 3.352. The agreement further provides that the franchisee must pay a continuing franchise fee equal to 3% of the monthly gross sales. On August 31, the franchiser completed the initial services required in the contract at a cost of P4,290,120 and incurred indirect cost of P175,000. The franchisee commenced business operations on November 30, 2020. The gross sales reported to the franchiser were P1,800,000 for December, 2020. The first installment payment was made in due date. 1, Assume the collectibility of the note is not reasonably assured, how much is the net income for the year ended, December 31, 2020? A. 3,126,268 B. 3,201,268 C. 2,417,268 D. 3,072,268 2. Assume the collectibility of the note is reasonably certain, how much is the net income for the year ended, December 31, 2020? A. 9,438,880 B. 9,384,880 C. 6,027,520 D. 6,552,520 2. On July 1, 2020, Megreen Inc., a franchisor, entered into a contract with a franchisee for the operation of a restaurant. The franchise agreement provides that the franchisee shall pay a non- refundable upfront franchise fee amounting to P2,500,000 with P500,000 payable at the signing of contract and the balance payable in five equal semi-annual instalments every December 31 and June 30. The franchisee issued a non-interest bearing note with effective interest rate of 10%. The present value of the note receivable is P1,731,791. The collection of the note receivable is unlikely. The franchise agreement further provides for the payment of on-going royalties equivalent to 3% based on franchisee’s sales revenue. During 2020, Megreen Inc. has substantially performed the direct cost of services required by the franchise in the amount of P1,785,433. In the same year, Mcgreen Inc. has also incurred indirect cost amounting to P10,000. For the years 2020 and 2021, the franchisee has reported sales revenue amounting to P400,000 and P600,000, respectively. 1, What is the net income to be reported by Megreen Inc, for the year ended December 31, 20207 A. 278,307 B, 251,272 C. 236,870 D. 291,470 2. What is the net income to be reported by Mcgreen Inc. for the year ended December 31, 20217 517,579 529,574 278,307 378,307 pope 8708| Page 3 3. On November 30, 2022, The Franchisor authorized a certain Franchisee to operate for an initial franchise fee of P1,950,000 of which P750,000 was considered a down payment, and the balance was represented by a note which was due in 4 equal annual installments starting November 30, 2023. The prevailing rate for similar note is 12%. The period of refund will elapse on January 31, 2023. As of the end of the year, the franchisor substantially performed all necessary initial services, but the operations of the store have not yet started. Collectability of the note is reasonably certain. (round PV factor 4 decimal places) ‘What is the amount of unearned franchise fee on December 31, 2022? A. 1,661,220 B. 750,000 C. 911,220 D. 0 4. On November 1, 2022, The Franchisor authorized a certain Franchisee to operate for an initial franchise fee of 3,400,000 of which 900,000 was considered as a down payment, the balance was represented by a non-interest bearing note, due in 5 equal annual installments beginning October 31, 2023, Prevailing rate was 12%, PV factor was 3.60478, The down payment already represents a fair measure of the services already performed by the franchisor, however as for the balance, substantial future services are still required. 1, What is the amount of deferred revenue to be recognized on December 31, 2022? A. 1,802,390 B. 2,500,000 C. 1,518,677 D. 2,702,390 2. What is the amount of total revenue recognized on December 31, 2022? A. 900,000 B. 2,702,390 C. 936,048 Dz 1,116,287 8708Page 4 5. On January 1, 2021, a franchisor entered into a franchise agreement with a franchisee which requires the latter to pay a non-refundable upfront fee of P800,000 at the signing of the contract and on-going payment of royalty equal to 5% of the sales of the franchisee. On the date of the signing of the contract, the franchisee paid the non-refundable upfront fee. As part of the franchise agreement, the franchisor shall render the following performance obligations which are considered separate and distinct from one another: I. Training ten personnel of the franchisee with stand alone selling price of P100,000. Ml. Construction of the franchisee's building and landscape with stand alone selling price of 400,000. IML Delivery of 1,000 units of raw materials to franchisee with stand alone selling price of 300,000. TV. Allowing the franchisee to use the franchisor's trademark and tradename for a term of 10 years starting from January 1, 2021 with stand alone selling price of P200,000. As of the end December 31, 2021, the accounting department of franchisor obtained the following information: 1, The franchisor was able to train seven out of ten personnel of the franchisee Tl. The percentage of completion of construction of the franchisee's building and landscape was estimated by the engineer and architect at 90% although the building was fully completed because the landscape was not yet started. III. 600 units of raw materials were already delivered to the franchisee. IV. For the year ended December 31, 2021, the franchisor reported sales revenue amounting to P100,000 because it already started operation upon the construction of the building on October 1, 2021 What is the total revenue to be reported by the franchisor for the year ended December 31, 2021? A. 509,000 B. 635,000 C. 488,000 D. 532,000 6. On January 1, 2020, an entity granted a franchise agreement to a franchisee. The contract provided that the franchisee shall pay an initial franchise fee of P500,000 and on-going payment of royalties equivalent to 8% of the sales of the franchisee. On January 1, 2020, the franchisee paid down payment of P200,000 and issued a 3-year noninterest bearing note for the balance payable in three equal annual installments starting December 31, 2020. The note has present value of P240,183 with effective interest rate of 12%. On June 30, 2020, the entity completed the performance obligation of the franchise at a cost of 352,146. Aside from that, the entity incurred indirect cost of P22,009. The franchisee started operation on July 1, 2020 and reported sales revenue amounting to P50,000 for the year ended December 31, 2020. The franchisee paid the first installment on its due date. 1, If the collection of the note receivable is reasonably assured, what is the gross profit to be recognized by the entity for the year ended December 31, 2020 in relation to the initial franchise fee? A. 66,028 B. 44,014 C. 22,009 D. 88,037 i 2. If the collection of the note receivable is reasonably assured, what is the net income to be reported by the entity for the year ended December 31, 2020? A. 98,850 B, 94,850 C. 70,028 D. 92,037 8708