ADVANCED ACCOUNTING VOL.

1
Chapter 10

FRANCHISE ACCOUNTING
(Peralta & Guererro)

Renato O. Daquioag CPA, MBA, CFC

FRANCHISE ACCOUNTING

A Franchise is the license to make or sell a product under certain conditions

granted by the owner of these rights. In other words, a franchise is the right to
produce a licensed product by the owner of the license. In this contact, the
franchisee pays the franchisor for the right to use the licensed material.
FRANCHISE FEES

TWO TYPE OF FRANCHISE FEE

1. Initial Franchise Fee - This represent initial payment for establishing

the franchise agreement.

Initial Franchise Fee Includes.

• Assistance in Site Selection for the construction of the building
• Supervision of the construction activity, which involves
obtaining financing designing building and supervising
contractor.
• Assistance in the acquisition of signs and fixtures and
equipment
• Provision of bookkeeping and advisory services
• Provision of employee and management training
• Provision of quality control
• Provision of advertising

2. Continuing Franchise Fee – This represent continues payment to

the franchisor for providing specific futures. Such advertising and for
the continuous use of intangible rights by the franchisee.
FRANCHISE REVENUE RECOGNITION

WHEN TO RECOGNIZE THE REVENUE?

Key words : When all materials and services or condition have been
substantially performed
1. No Refund
2. Services is already completed
3. No other material condition or
obligation exist

Direct Franchise Cost – Shall be deferred until related revenue is

recognized.

Indirect Cost – Expense when incurred

FRANCHISE REVENUE RECOGNITION

Franchise Fee Accounting Method:

1. Accrual Method - Reasonably Assured

2. Installment Method – Not Reasonably Assured
3. Cost Recovery Method - Uncertain

Case Illustration:

Jan 5 2016: Mcdo Inc. granted Franchise to Mr A to Sell Mcdo Products.

IFF – 10,000,000
Feb to Nov: Mcdo inc rendered Services.
Direct Cost - 2,000,0000
Indirect Cost – 50,000
December 1 : The Franchise of Mr A Started business Operation

Addition: The initial Franchise Fee is Payable as follow : 1,000,000 cash

when the contract is signed and the balance in five annual installment
payable every December 31. Evidence by a 12% percent promissory note
 Computation of net Income:

Operating Income
Case 3 Illustration: Initial Franchise fee is payable as follows: Cash of
1,000,000 upon signing of the contract and the balance in Five equal
Installment every December 31 evidence by a non interest bearing note.
Franchise can borrow money at 12% and the present value of an ordinary
annuity of 1 at 12% for 5 period is 3.6048. thus the present value of five
payments of 1,800,000 would be 6,488,640 (P1,800,000 x 3.6048). Assuming
that the collectability of the note is not reasonably assured, using the
installment method/gross profit method of revenue recognition what is the Net
Income?
Computation Comparison
Next : Application of Concept to Problems.

END.