CHAPTER # 8

REVENUE RECOGNITION– CONTRACTS WITH CUSTOMERS:

TITLE
FRANCHISE & CONSIGNMENT

B. DEVELOPMENTAL ACTIVITIES

INTRODUCTION

A franchise is a contractual arrangement under which the franchisor grants franchisee the right to sell certain
products or services, to use certain trademarks or trade names, or to perform certain functions, usually within a
designated geographical area.

Two Types of Franchises:

 Contractual arrangement between two private entities or individuals

 Contractual arrangements between a private entity or an individual and the government

Two Sources of Revenue:

 Sale of Initial franchise fee and related assets or services (Initial Franchise Fee)
 Continuing fees based on the operations of franchises (Continuing Franchise Fees)

Performance Obligations:

 Right to open a business

 Use of trade name or other intellectual property of the franchisor
 Continuing services, such as marketing help, training and in some cases supplying inventory and inventory
management.

Initial Franchise Fee

Franchise agreements vary but usually involve an initial payment (called an initial franchise fee) by the franchisee
and ongoing payments of continuing franchise fees. For initial franchise fee, the franchisor (the party who grants
business rights under the franchise) normally provides the franchisee (the party who operates the franchised
business) with the following services:

1. Assistance in site selection

a. Analyzing location
b. Negotiating lease
2. Evaluation of potential income
3. Supervision of construction activity
a. Obtaining financing
b. Designing building
c. Supervising contractor while building
4. Assistance in the acquisition of signs, fixtures, and equipment
5. Provision of bookkeeping and advisory services
a. Setting-up franchisee’s records
b. Advising on income, real estate, and other taxes
c. Advising on local regulations of the franchisee’s business
6. Provision of employee and management training
7. Provision of quality control

Continuing Franchise Fee (Royalty Fee)

Continuing franchise fees (royalty fee) are received in return for the continuing rights granted by the franchise
agreement and for providing such services as management training, advertising and promotion, quality control,
budgeting and other accounting service, legal assistance, and other support.
The continuing fees (royalty payments) , which are typically computed as a percentage of the franchisee’s sales but
can also be a fixed periodic amount, are recognized by the franchisor as revenue in the same period that the sales
are made by the franchisee.

Occasionally, the continuing franchise fee (royalty payments) is not large enough to cover the franchisor’s cost of the
continuing services provided. However, the initial franchise fee is unusually large. In such cases, the franchisor
records a portion of the initial fee as a liability and amortizes the amount to franchise revenue over the life of the
franchise (over time).

FRANCHISE ACCOUNTING

 Initial Franchise Fee

Substantial Performance:

1. Down payment is nonrefundable

2. Initial services have been performed.

3. Actually commence operations

YES NO

Revenue from initial Deferred Revenue from

franchise fee Initial Franchise Fee

 Continuing Franchise fee

o collected at the end of each month base on a certain percentage of their monthly sales
o Continuing fees (royalty fee) should be reported as revenue when they are earned (over time) and
receivable from the franchisee, unless a portion of them has been designated for a particular
purpose, such as providing a specified amount for building maintenance or local advertising. In that
case, the portion deferred shall be an amount sufficient to cover estimated cost in excess of
continuing franchise fees and provide a reasonable profit on the continuing services (point in
time).

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.

Franchise Cost:

1. Direct franchise cost- deferred until related revenue is recognized. It should not exceed the anticipated
related revenue.

2. Indirect franchise cost- occurs on a regular basis, should be expensed when incurred.

Note: All Direct and Indirect Costs related to Continuing Franchise Fee are expensed when incurred

ILLUSTRATIONS

Illustration 1: VVL Pizza Inc. enters into a franchise agreement on December 31, 2020, giving JK Corp. the right to
operate as a franchisee of VVL Pizza for 5 years. VVL’s charges JK an initial franchise fee of P475,000 for the right
to operate as a franchisee. Of this amount, P190,000 is payable when JK Corp. signs the agreement, and the
balance is payable in five annual payments of P57,000 each on December 31.
Consider the following for allocation of the transaction price at December 31, 2020.

Rights to trade name, market area, technical and proprietary know-how P190,000
Services-training, etc. 94,591.50
Machinery and equipments, etc. (costing, P95,000) 133,000
Total Transaction Price P417,591.50

The credit rating of JK indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five
annual receipts of P57,000 each discounted at 8% is P227,591.50. The discount of P57,408.50 represents the
interest revenue to be accrued by VVL Pizza Inc. over the payment period.

Training is completed in February 1, 2021, the equipment is installed in February 2, 2021, and JK holds a grand
opening on February 4, 2021. On February 4, 2021, franchise opens. VVL’s satisfies the performance obligations
related to franchise rights, training, and equipment.

JK also promises to pay ongoing royalty payment of 1% of its annual sales (payable every January 31 of the
following year) and obliged to purchase products from VLL’s at its current standalone selling prices at the time of
purchase.

Assume that the sales in 2021 amounted toP4,987,500.

Step 1: Identify the contract with a customer.

 The contract is a franchise contract.

Step 2: Identify the separate performance obligations within a contract.

 PO1:Rights to trade name, market area, technical and proprietary know-how
 PO2:Services-training, etc.
 PO3: Equipment

Step 3: Determine the transaction price.

 The Transaction Price is P417,591.50.

Step 4: Allocate the transaction price.

Rights to trade name, market area, technical and proprietary know-how P190,000
Services-training, etc. 94,591.50
Machinery and equipment, etc. (costing, P95,000) 133,000
Total Transaction Price P417,591.50

Step 5: Recognize Revenue when (or as) each performance obligation is satisfied.

Timing: Point in time

 PO1: Rights to trade name, market area, technical and proprietary know-how
 PO2: Services-training, etc.
 PO3: Equipment

Journal Entries:

December 31, 2020

Cash 190,000
Notes Receivable 285,000
Unearned Interest Income (Discount on Notes 57,408.50
Receivable)
Unearned Franchise Revenue 190,000
Unearned Service Revenue -training, etc. 94,591.50
Unearned Sales Revenue – machinery &equipment, 133,000
etc.
To record the receipt of upfront payment and note.

February 4, 2021 (Point in Time)

Unearned Franchise Revenue 190,000
Unearned Service Revenue -training, 94,591.50
etc.
Unearned Sales Revenue – 133,000
machinery & equipment, etc.
Franchise Revenue 190,000
Service Revenue -training, etc. 94,591.50
Sales Revenue – machinery & 133,000
equipment, etc.
To record recognition of revenue (point in time)
 Cost of Goods Sold 95,000
Inventory 95,000
To record cost of the equipment sold.

December 31, 2021

Accounts Receivable (4,987,500 x 1%) 49,875
Franchise Revenue 49,875
To record the continuing franchise fees.

Cash 57,000
Notes Receivable 57,000
To record payment received.

Unearned Interest Income (or Discount in Notes 18,207.32

Receivable)
Interest Income 18,207.32
To record interest income on notes. (P227,592.50 x 8%)

Computation of Franchise Revenue and Net Income:

Franchise Revenue:
Initial Franchise Fee (Point in Time: Feb 4, 2020) P417,591.50
Continuing Franchise Fee (Over Time) 49,875
Total Franchise Revenue P467,466.50
Costs of Goods Sold (95,000)
Gross Profit 372,466.50
Operating Expenses -
Interest Income on Notes Receivable 18,207.32
Net Income P390,673.82

Illustration 2: Pacific Crossburgers Inc. charges an initial fee of P70,000. Upon the signing of the agreement (which
covers 3 years), a payment of P28,000 is due. Thereafter, three annual payments of P14,000 are required. The credit
rating of the franchisee is such that it would have to pay interest at 10% to borrow money. the franchise agreements
signed on May 1, 2020, and the franchise commences operation on July 1, 2020.

CASE 1: Assuming no future services are required by the franchisor once the franchise starts operation.

Step 1: Identify the contract with a customer.

 The contract is a franchise contract.

Step 2: Identify the separate performance obligations within a contract.

 Rights to trade name, market area, technical and proprietary know-how.

Step 3: Determine the transaction price.

Down payment P28,000
Present value of Subsequent Collections (P14,000 x 2.4869) 34,816
Transaction Price P62,816

Step 4: Allocate the transaction price.

The transaction price is to be allocated entirely to the single performance obligation.

Step 5: Recognize Revenue when (or as) each performance obligation is satisfied.

Timing: Point in time

Journal Entries:

May 1, 2020 (Date of Signing)

Cash 28,000
Notes Receivable 42,000
Discount on Notes Receivable (42,000-34,816) 7,184
Unearned Franchise Revenue 62,816
To record receipt of down-payment and a note.
July 1, 2020 (Date of Opening-Point in time)
Unearned Franchise Revenue 62,816
Franchise Revenue 62,816
To record recognition of revenue point in time.

CASE 2: Assuming that franchisor has substantial services to perform, once the franchise begins operations, to
maintain the value of the franchise.

Step 1: Identify the contract with a customer.

 The contract is a franchise contract.

Step 2: Identify the separate performance obligations within a contract.

 To maintain the value of the franchise

Step 3: Determine the transaction price.

Down payment P28,000
Present value of Subsequent Collections (P14,000 x 2.4869) 34,816
Transaction Price P62,816

Step 4: Allocate the transaction price.

The transaction price is to be allocated entirely to the single performance obligation.

Step 5: Recognize Revenue when (or as) each performance obligation is satisfied.
Timing: Over Time

Journal Entries:

May 1, 2020 (Date of Signing)

Cash 28,000
Notes Receivable 42,000
Discount on Notes Receivable (42,000-34,816) 7,184
Contract Liability 62,816
To record receipt of down-payment and a note.
Note: Contract Liability is generally referred to as unearned sales (service) revenue or any appropriate account.

July 1, 2020 (Date of Opening)

NO ENTRY. Substantial performance is to be performed over time.

December 31, 2020 (Over time)

Unearned Franchise Revenue 13,959
Franchise Revenue 13,959
To record recognition of revenue over time (62,816 / 3) x 8/12

CASE 3: Assuming the total franchise fee includes training services (with value of 2,400) for the period leading up to
the franchise opening and for two months following the opening.

Step 1: Identify the contract with a customer.

 The contract is a franchise contract.

Step 2: Identify the separate performance obligations within a contract.

 PO1:Rights to trade name, market area, technical and proprietary know-how
 PO2:Services-training for the period leading up to the franchise opening and for two months following the
opening

Step 3: Determine the transaction price.

Down payment P28,000

Present value of Subsequent Collections (P14,000 x 2.4869) 34,816
Transaction Price P62,816

Step 4: Allocate the transaction price.

Rights to trade name, market area, technical and proprietary know-how P60,416
Services-training, etc. 2,400
 Total Transaction Price P62,816

Step 5: Recognize Revenue when (or as) each performance obligation is satisfied.

Timing:
 PO1:Rights to trade name, market area, technical and proprietary know-how (Point in Time)
 PO2:Services-training for the period leading up to the franchise opening and for two months following the
opening (Over Time)

Journal Entries:

May 1, 2020 (Date of Signing)

Cash 28,000
Notes Receivable 42,000
Discount on Notes Receivable (42,000-34,816) 7,184
Unearned Franchise Revenue 60,416
Unearned Service Revenue 2,400
To record receipt of down-payment and a note.

July 1, 2020 (Date of Opening)

Unearned Franchise Revenue 60,416
Unearned Service Revenue (2,400 x 2/4) 1,200
Franchise Revenue 60,416
Service Revenue 1,200
To record recognition of franchise revenue (point in time) and service revenue (over time.)

September 31, 2020 (End of training for Two months following the opening - Over time)
Unearned Service Revenue (2,400 x 2/4) 1,200
Service Revenue 1,200
Franchise Revenue 13,959
To record recognition of service revenue over time.

BARGAIN PURCHASES (POINT IN TIME)

In addition to providing services as part of the continuing franchise fee, a franchisor often sells supplies to the
franchisee. These sales occur because the franchisor may be able to obtain quantity discounts from manufacturers
or wholesalers, or to ensure the quality of the supplies. The franchisor records these sales and related expenses in
the normal manner.

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.

The amount to be deferred shall be either of the following:

 The reasonable profit (if indicated bargain price is lower than normal selling price); or
 A portion or full amount of the initial franchise fee should be deferred and recognize at point in time or at
the time the equipment and the supplies will be delivered.

The deferred portion would be accounted for as an adjustments of selling price when the franchisee subsequently
purchases the equipment or supplies (point in time)

Illustration: Pasta Inn charges an initial fee of P1,600,000 for a franchise, with P320,000 paid when the agreements
is signed and the balance is four annual payments. The present value of the annual payments, discounted at 10% is
P1,014,000. The franchisee has the right to purchase P60,000 of kitchen equipment and supplies for P50,000. An
additional part of the initial fee is for advertising is P1,000 a month. Collectability of the payments is reasonably
assured an Pasta Inn has performed all the initial services required by the contract. How much revenue from
franchise fee be recognized when agreement is signed?
Total Franchise Fee P1600,000
Less: Unearned Franchise Fee
Amount Due P1.280,000
Less: PV of Payments 1,014,000 (266,000)
Bargain Purchase Option (P60,000 – P50,000) (10,000)
Advertising (1,000 x 60 months) (60,000)
Revenue From Franchise Fee P1,264,000

Entry:
 Cash 320,000
Notes Receivable 1,280,000
Unearned Interest Income (Discount on Notes Receivable) 266,000

Franchise Revenue 1,264,000

Unearned Franchise Fee (10,000 + 60,000) 70,000
To record the receipt of upfront payment and note.

CONSIGNMENT ACCOUNTING

A consignment constitutes the transfer of possession of merchandise without transfer of title from the owner, called
the consignor, to another person, called the consignee. The consignee acts as an agent in behalf of the consignor for
the purpose of selling the goods for a commission.

The shipment of goods to the consignee does not transfer the title of the goods, thus, it is not treated as a sale. The
recognition of sale is deferred until goods are transferred to a third party by the consignee. (e.g. customer)

The merchandise carried throughout the consignment as the inventory of the consignor, separately classified as
Merchandise Inventory on Consignment. It is not recorded as an asset in the consignee’s book. Upon sale of the
merchandise, the consignee has liability for the net amount due the consignor.

Paragraph B78 of PFRS 15 provides some of the indicators that an arrangement is a consignment arrangement:
 the product is controlled by the entity until a specified event occurs, such as the sale of the product to a
customer of the dealer or until a specified period expires;
 the entity is able to require the return of the product or transfer the product to a third party (such as another
dealer); and
 the dealer does not have an unconditional obligation to pay for the product (although it might be required to
pay a deposit).

Pro-forma Journal Entries:

CONSIGNOR CONSIGNEE
DR. CR. DR. CR.
(1) Shipment of Goods on Consignment
Inventory on xxx No Entry
Consignment (MEMO)
Finished Goods xxx

(2) Payment of Expenses by Consignor

Inventory on xxx No Entry
Consignment
Cash xxx

(3) Payment of Expenses by Consignee

Inventory on xxx Consignor xxx
Consignment Receivable
Consignee Payable xxx Cash xxx

(4) Sale of Merchandise

No Entry Cash xxx
Consignor Payable xxx

(5) Notification of Sale to Consignor and payment of cash due

Commission xxx Consignor xxx
Expense Payable
Cash xxx Cash xxx
Consignee xxx Commission Revenue xxx
Payable
Consignment Sale xxx Consignor Receivable xxx
Revenue

Cost of Goods xxx

Sold
 Inventory on xxx
Consignment

Costs and Expenses for the Consignment Transaction

 To be allocated between sold and unsold items:

o Freight cost paid by the consignor upon shipment
o Freight and cartages paid by the consignee upon receipt of the shipment
o Insurance freight of consigned goods
o Packaging costs of consigned goods
o Costs and fees such as repairs, installation of devices paid b the consignor and/or consignee
related to the consigned goods

 Chargeable to the sold units:

o Commissions
o Delivery and installation
o Advertising
o Reconditioning on delivered units to customers
o Insurance in transit to customers
o Expenses related to returned units delivered

ILLUSTRATION

TS Trading consigned 100 beds costing P600 each to PP Company. The advertised selling price is P1,000 each bed.
The consignment agreement provides that the consignee is to be allowed a commission of 15% of the selling price.
Furthermore, PP Co. has to draw a sight draft of 60% of the cost of beds; the advance is to be recovered periodically
by monthly deductions (in proportion to units sold) from the remittances which accompany the account sales. All
expenses of the consignee are to be deducted monthly as incurred.
At the end of the first month, the consignee rendered an account sales showing among others the following charges:
Commission, P2,250; Advertising, P1,500; and Delivery Expense, P750.

Requirement:
1. The number of units sold by PP Co. is:
2. The amount remitted to TS Co. for the month is:
3. The consignment profit (loss) of TS is:

Suggested Answers:
1. 15 units
Sales (P2,250/15%) P15,000
Divided by: Selling Price per unit 1,000
Number of units sold 15 units

2. P5,100
Sales P15,000
Less: Charges by consignee
Commission P2,250
Advertising 1,500
Delivery Expense 750 4,500
Due to Consignor P10,500
Less: Advances
Value of Note-sight draft (100 beds x P600 per bed) x 60% P36,000
x Proportional number of beds sold 15/100 5,400
Amount Remitted P5,100

3. P1,500
Sales P15,000
Less: Charges
Consignor’s charge:
Cost of Beds(P600 per bed x 15 beds) 9,000
Consignee’s charges:
Commission P2,250
Advertising 1,500
Delivery Expense 750 4,500
Consignment Net Income P1,500
C. CLOSURE ACTIVITIES

C. CLOSURE ACTIVITIES

The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in
your portfolio journal.

I. MULTIPLE CHOICE THEORIES

1. Revenue on sales- based royalty payments should be recognized

a. when the amount of sales can be determined
b. on the date payment is received by the franchisor
c. on the date the performance obligation is satisfied
d. on the date the contract was signed
2. Continuing franchise fees should be recorded by the franchisor
a. as revenue when uncertainty related to the variable consideration is resolved
b. as a revenue when received
c. in accordance with the accounting procedures specified in the franchise agreement
d. as a revenue only after the balance of the initial franchise fee has been collected
3. Franchise revenue are recognized over time if
a. franchise rights are transferred at a point in time
b. the franchisee fee is payable upon signing of the contract
c. performance obligation regarding franchise rights are completed when the franchise opens
d. None of these answer choices are correct.
4. Types of franchising agreement s include all of the following except
a. service sponsor-retailer
b. wholesalers-service sponsor
c. manufacturer-wholesaler
d. wholesaler-retailer
5. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment
or supplies. When recording the initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the expected future purchases
b. record a portion of initial franchise fee as unearned revenue which will increase the selling the selling price
when the franchisee subsequently makes the bargain purchases
c. defer recognition of any revenue from the initial franchise fee until the bargain purchase are made
d. none of these answer choices are correct
6. In accounting for sales on consignment, sales revenue and related cost of goods sold should be recognized by
the:
a. consignor when the goods are shipped to the consignee
b. consignee when the goods are shipped to the third party
c. consignor when notification is received the consignee has sold the goods
d. consignee when cash is received from the customer
7. consigned goods are recognized as revenue by the
a. consignor when a sale to a third party has occurred
b. consignor when the merchandise has shipped to a consignee
c. consignee when a sale to a third party has occurred
d. consignor when it receives payment from consignee for goods sold
8. Which of the following is most true regarding consignment arrangement?
a. revenue is recognized at point un time when the consignment arrangement is made
b. revenue is recognized when goods are transferred to the consignee
c. revenue is recognized upon sale by the consignee to an end customer
d. revenue is never recognized because GAAP does not allow such arrangement
9. Consignments are specialized marketing method whereby the
a. consignee purchases goods for sale and sends payment when goods are sold
b. consignee (agent) holds title to the product
c. consignee pays for good up front and is paid when merchandise is sold
d. consignee takes possession of merchandise but the title remains with manufacturer
10. In consignment sales, the consignee
a. records the merchandise as an asset on its books
b. records a liability for the merchandise held on consignment
c. recognizes revenue when it ships merchandise to the consignor
d. prepares an “account report” for the consignor which shows sales expenses, and cash receipts
II. PROBLEMS

Problem 1: Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as a franchisee of
Frozen Delight. of this amount P25,000 is collected immediately. The remainder is collected in four equals annual
installments of P12,500 each. These installments have a present value of P41,402. As part of the total franchise fee,
Frozen Delight also provides training (with fair value of P2,000) to help franchisees get the store ready to open. The
franchise agreement is signed of April 1, 2020, training is completed, and the store opens on Jul 1, 2020.
Requirement:
1. The amount of Revenue from training and franchise on April 1, 2020 to:
2. The amount of Revenue from training and franchise on July 1, 2020 to:

Problem 2: On June 1, DD Co. shipped twenty five DVD to BB View Store on consignment. The DVD is to be sold at
an advertised price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid P75 to ship
the merchandise. Commission is to be 25% of sales price. During the month, two DVD were returned. On June 30,
BB View Store remitted the amount due to consignor after deducting commission of P400.
Requirement:
1. The amount remitted by BB View Store is:
2. The consignment profit is:
3. The cost of inventory on consignment amounted to:

Problem 3: XY Inc., franchisor, entered into franchise agreement with AB Inc., franchisee, on July 1, 2020. The initial
franchise fee agreed upon is 850,000, of which 150,000 is payable upon signing and the balance to be covered by
non-interest bearing note payable in four equal annual installments. It was agreed that 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%. The franchisee commenced its
operation on July 31, 2020. A continuing franchise fee equal to 5% of its monthly gross sales. AB reported gross
sales of 950,000 for the month.
When XY prepares Financial Statement on August 31, 2020, how much is the net income to be reported? PV Factor
is 3.04.

Problem 4: On June 1, 2021, Pitch entered into a franchise agreement with Perfect Inc. to sell their products. The
agreement provides for an initial franchise fee of 1,500,000 which is payable as follows: 500,000 cash to be paid
upon signing the contract, and the balance in four equal annual installments every December 1, starting in 2021.
Pitch signs a non-interest bearing note for the balance. The credit rating of the franchisee indicates that the money
can be borrowed at 10%. The present value factor of ordinary annuity at 10% for 4 periods is 3.1698. The agreement
further provides that the franchise must pay continuing franchise fee of 83,700. The franchisee started business
operations on July 1, 2021 and was able to generate sales of 620,000 for 2021. The first installment payment was
made in due date. Assuming that the collectability of the note is not reasonably assured, how much is the net income
of the franchisor for the year ended December 1, 2021?

Problem 5: On August 1, 2022, Sam Inc. entered into a franchise agreement with Smith franchisee. The initial
franchise fees agreed upon is 246,900, of which 46,900 is payable upon signing and the balance to be covered by
non-interest bearing note payable in four equal annual installments. The down payment is refundable within 95 days.
Smith Inc. has a high credit rating thus collection of the note is reasonably assured. Out of the pocket cost of 125,331
and 12,345 were incurred for direct expenses and indirect expenses respectively. Prevailing market rate is 9%. PV
factor is 3.2397. On the fiscal year ended October 31, 2022, how much revenue will the franchisor recognize?

Problem 6: Mike restaurant sold a fast food restaurant franchise to Irish. The sale agreement, signed on
January 2010 called for a 100,000 down payment plus two 50,000 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 franchisor. The restaurant opened early in 2010 and its sales for the year amounted to 750,000.
Assuming a 12% interest rate is appropriate, Mike 2010 total revenue will be: (PV of annuity of P1 at 12% for
two periods is 1.6901)

Problem 7: On April 1, 2022, Good Inc. entered into a franchise agreement with Best franchisee. The initial franchise
fees agreed upon is 246,900, of which 46,900 is payable upon signing and the balance to be covered by 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. Out of the pocket cost of 125,331 and
12,345 were incurred for direct expenses and indirect expenses respectively. Prevailing market rate is 9%. PV factor
is 3.2397. On the fiscal year ended June 30, 2022, how much revenue from the franchise fee will the franchisor
recognize?

Problem 8: ABC Charges 495,000 for a franchise with 99,000 paid when the agreement is signed and the balance in
four annual payments. The PV of annual payments discounted at 9% is 320,732.50 the franchisee has the right to
purchase 100,000 of equipment and supplies for 88,000. If the collectability of the payment is reasonably assured,
and substantial performance by ABC has occurred. Which of the following is FALSE?
A. ABC has total revenue of 419,732.50
B. ABC will credit unearned interest income of 75,267.50
C. ABC will debit notes receivable of 396,000
D. ABC will credit unearned franchise revenue of 22.000

Problem 9: The Consignment Out Account in the books of LVC Corporation is shown below:
Consignment Out- MBK Company
DEBIT CREDIT
December 15: 10 radio sets P15,000 Dec 30 4 sets sold
Cartage 1,200
30: charges by the consignee:
Freight on receipt of
Consignment 800
20% commission 3,200
Delivery and
Installation 400
Consignee gave only a partial remittance since P1,500 is still collectible
Required:
a. How much was the cash remittance?
b. How much was the consignment profit or loss?
c. How much was the balance of the Consignment Out account representing inventoriable cost to be brought
forward to the month of January?
d. Give the entries in the books of both the consignor and consignee

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:
 A franchise is a contractual arrangement under which the franchisor grants franchisee the right to sell
certain products or services, to use certain trademarks or trade names, or to perform certain functions,
usually within a designated geographical area.
 If the performance obligation in a franchise contract is satisfied over time, revenue is recognized over the
duration of the franchise contract as the performance obligation is satisfied. The entity shall determine an
appropriate method of measurement of its progress towards the complete satisfaction of the performance
obligation.
 If the performance obligation in a franchise contract is satisfied at point in time, revenue is recognized when
performance obligation is satisfied.
 Revenue from sales-based or usage-based royalties are recognized when those sales or usage occur.
 A consignor recognizes revenue from a consignment arrangement when the consigned goods are sold to
end customers.
 Consigned goods are included in the consignor’s inventory.
 Freight and other incidental costs of transferring consigned goods to consignee form part of the cost of the
consigned goods.

V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

VI. ASSIGNMENT/ AGREEMENT

 Millan, Accounting for Special Transactions 2018e
Dayag, Advanced Financial Accounting and Reporting
VII. REFERENCES 2019e
IFRS 15 Revenue from Contracts with Customers
Dayag, Advanced Financial Accounting and Reporting
Reviewer

END OF CHAPTER 8