Advanced Financial Accounting

FRANCHISE

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 P1 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?

2. Assume the collectibility of the note is reasonably certain, how much is the net income for
the year ended, December 31, 2020?

2. XY Inc., franchisor, entered into franchise agreement with AB Inc., franchisee on July 1, 2020.
The initial franchisee fees agreed upon is P850,000, of which P150,000 is payable upon signing
and the balance to be covered by a non-interest bearing note payable in four equal annual
installments. It was agreed that the down payment is not refundable, notwithstanding lack of
substantial performance of services by franchiser. Probability of collection is unlikely.

The following expenses were incurred:

Initial Services:
Direct Cost 235,000
Indirect Cost 64,000
Continuing Services
Direct Cost 23,900
Indirect Cost 9,000

The management of AB has estimated that they can borrow loan at the rate of 12% (PV factor
3.04). The franchisee commenced its operations on July 31, 2020. A continuing franchise fee
equal to 5% of its monthly gross sales was also specified in the contract. AB reported gross sales of
P950,000 for the month.

How much is the net income to be reported on August 31, 2020?

3. MIKE restaurant sold a fastfood restaurant franchise to Irish. The sale agreement, signed on
January 2020 called for a P100,000 down payment plus two P50,000 annual payments representing
the value of initial franchise services rendered by MIKE restaurant. In addition, the agreement
required the franchisee to pay 8% of its gross revenues to the franchisor. The restaurant opened
early in 2020 and its sales for the year amounted to P750,000. The prevailing rate for similar note
was 12% (PV factor was 1.6901).

How much is the total revenue for 2020?

4. On April 1, 2020, GOOD Inc. entered into a franchise agreement with BEST franchisee. The initial
franchise fees agreed upon is P246,900, of which P46,900 is payable upon signing and the balance
to be covered by a non-interest bearing note payable in four equal annual installments. The down
payment is refundable within 100 days. BEST Inc. has a high credit rating, thus, collection of the
note is reasonably assured. GOOD Inc. substantially performed all necessary requirements and
incurred out-of-pocket costs of P125,331 and P12,345 for direct expenses and indirect expenses
respectively. Prevailing market rate is 9%. PV factor is 3.2397.

For the fiscal year ended June 30, 2020, how much revenue from franchise fee will the
franchisor recognize?
1
5. Starbeans Inc. operates and franchises coffee shops around the world. On January 1, 2020,
Starbeans Inc. entered into a franchise agreement with a franchisee. As part of its franchise
agreement, Starbeans requires a franchisee to pay an initial franchise fee in the amount of
P1,500,000 of which P500,000 is payable at the date of perfection of contract and the balance
payable in five equal annual instalments every December 31. The franchisee issued a non-interest
bearing note with effective interest rate of 10% for the balance of the initial franchise fee and the
present value of the note is P758,157. The franchise agreement also provides for ongoing payment
of royalties of 5% based on sales revenue of franchisee. As part of the franchise agreement,
Starbeans provides pre-opening services, including supply and installation of coffee equipment and
cash registers with a total cost of P754,894. Starbeans evaluates and determines that the contract
with the customer is a single performance obligation that need not be separated. As of July 1, 2020,
Mcjobee already satisfied its performance obligation to supply and install coffee equipment and
cash registers to the franchisee. For the year ended December 31, 2020, the franchisee reported
sales revenue in the amount of P1,000,000.

1. What is the net income to be reported by Starbeans for the year ended December 31,
2020, if the collection of the note receivable is reasonably assured?

2. What is the net income to be reported by Starbeans for the year ended December 31,
2020, if the collection of the note receivable is not reasonably assured?

END