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UNIVERSITY OF THE EAST – Caloocan

College of Business Administration
Department of Accountancy, Business Law and Taxation
Advanced Financial Accounting & Reporting Part 1 (AC 310B)
Quiz – Franchise Accounting

Name: ___________________________________Yr. and Section: ________Prof. J. C. MINORCA, CPA

Instructions: In the following problems, provide the answers with supporting computations in good form.

Short Problems:

1. On January 1, 2011, R Inc. signed an agreement authorizing Mr. S to operate as a franchisee for an
initial fee of P625, 000. Of this amount, P250, 000 was received upon signing of the agreement and the
balance evidenced by a 12% note which is due in three annual installment of P125, 000 each
beginning December 31, 2011. Mr. S started operations on September 1, 2011 after R rendered initial
services required at a total cost of P62, 500. The first installment was collected on due date. The
collectibility of the note is not reasonably assured.

What is the realized gross profit to be recognized on December 31, 2011?

2. On April 1, 2010, Crush Kita entered into a franchise agreement with I Love You Inc., franchisee. The
initial franchise fees agreed upon is P1, 234, 500, of which P234, 500 is payable upon signing and the
balance to be covered by a non – interest bearing note payable in four equal annual installments. The
downpayment is refundable within 100 days. I Love You has a high credit rating, thus, collection of the
note is reasonably assured. Out- of pocket costs of P626, 655 and P61, 725 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, 2010, how much revenue from franchise fee will the franchisor
recognize?

3. On January 1, 2010, T&T Co. entered into a franchise agreement with Sy Inc., franchisee. The initial
franchise fees agreed upon is P1, 520, 000, of which P720, 000 is payable upon signing and the
balance to be covered by a non- interest bearing note payable in four equal installments starting next
year. Initial services’ out- of pocket costs of P820, 764 and P68, 397 were incurred for direct expenses
and indirect expenses respectively. Prevailing market rate is 9%. PV factor is 3.2397. The collectability
of the note is not reasonably assured. A 5% continuing franchise fee is to be paid monthly by Sy based
on its monthly gross sales. Franchisee commenced operations on October 1, 2010. Gross sales for the
first months amounted to P567, 000.

How much was the net income for the year ended December 1, 2010?

4. On January 1, 2010, Mr. JK entered into a franchise agreement with DBM 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 the five equal annual payments every end of the year
starting December 31, 2010. Mr. JK 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 operation on November 30, 2010. The gross sales
reported to the franchiser were P1,800,000 for December, 2010. The first installment was made in due
date.

Assume the collectibility of the note is not reasonable assured, the net income for the year ended,
December 31, 2010.
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5. AB Inc., franchisor, entered into franchise agreement with AD Inc., franchisee on July 1, 2010. The
initial franchisee fee 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 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 P235, 000
Indirect cost 64, 000
Continuing services:
Direct cost 23, 900
Indirect cost 9, 000

The management of AD has estimated that they can borrow loan at the rate of 12%. The franchisee
commenced its operations on July 31, 2010. A continuing franchise fee is equal to 5% of its monthly
gross sales. AD reported gross sales of P950, 000 for the month.

When AB prepares its financial statements on August 31, 2010, how much is the net income to be
reported? PV factor is 3.04.

On September 1, 2014, Ng Company entered into a franchise agreement with three (3) franchisees. The
agreements required an initial fee of payment of P7,000 plus four (4) P3,000 payments due every 4
months, the first payment due December 31, 2014. The interest rate is 12%.

The initial deposit is refundable until substantial performance has been completed. The following table
describes each agreement.

Franchisee Probability of Full Service Performed by Total Cost Incurred to

Collection Franchiser at December 31, 2014
December 31, 2014
A Likely Substantial P 7,000
B Doubtful 25% 2,000
C Doubtful Substantial 10,000

For each franchisee, identify the revenue recognition method that you would recommend, considering the
circumstances. What amount of revenue and income would be reported in 2014 for the method selected?
Assume that P10,000 was received from each franchisee during the year.

6. In its 2014 income statement, Ng should report franchise revenue for franchisee A:

7. In its 2014 income statement, Ng should report net income for Franchisee A:

8. In its 2014 income statement, Ng should report franchise revenue for Franchise B:

9. In its 2014 income statement, Ng should report net income for Franchisee B:

10. In its 2014 income statement, Ng should report franchise revenue for Franchisee C:

11. In its 2014 income statement, Ng should report net income for Franchisee C:

“That in all things, GOD maybe glorified”

“Salvation is found in Christ alone, for there is no other name given under heaven, by which man might be
saved. Believe in Christ, and you will be saved, you and your entire household” Acts 4:12; 16:31

‘GOD is the giver of all things. Man cannot receive anything unless it be given him from above”
John 3:27