ADVANCED ACCOUNTING 1 – Chapter 8: Accounting for Franchise Operations – Franchisor

James B. Cantorne
Problem 1. T/F
1. False
The current PFRS addresses the revenues from franchise contracts.
2. True
3. False
Right to use because the intellectual property does not change over the license period
4. True
5. False
Revenue recognized need not be adjusted at FV of the considerations receivable from the
franchise contract.
Problem 2. MCQ – Theory
1. B.
Distinct if (a) customer can benefit and (b) separately identifiable
2. B
The other choices are administrative task or task needed to set up the franchise contract, or
essential to its existence in accordance with PFRS 15.26
3. C.
If the license is distinct, the entity will use specific principles under PFRS 15
4. A.
The performance obligation is satisfied over time because Customer X has right to access.
5. B.
If the franchisor is required to undertake activities that will affect intellectual property, the
performance obligation is satisfied over time
6. A.
A is incorrect because the license and the updates are both single performance obligation and
satisfied over time as the franchisor is continually involved by updating the intellectual property.
In addition, general principle is still involved in determining the performance obligation satisfied.
7. A.
Revenues earned from franchise contract are match with expenses or direct costs
8. B.
Using matching concept, if revenue is earned on Jan 31, 20x2, expenses related to the franchise is
also recognized on such date.
9. A.
If collection is uncertain, any amount received is recognized as liability.
10. C.
Uncertainty of collection in subsequent period is accounted for as impairment.
Problem 3. Exercise
a. Determine the following:
i. There are two performance obligations in the contract, grant of the license and delivery of
equipment.
General principle is applied to the latter obligation, and it is satisfied at a point in time
 which is on February 1, 20x1.
Since franchise is distinct, specific principle is applied. The franchise grants a right to
access as the franchisor undertake activities that evidence the continual involvement of
franchisor in the intellectual party such as analyzing change in customer preference,
implementing product improvement, etc.
ii. The transaction price is include P450,000 fixed consideration and 5% sales-based royalty
variable consideration.
iii. The P150,000 of P450,000 fixed consideration is allocated to the equipment while the
remaining balance of P300,000 is allocated to the franchise license
5% sales-based royalty is allocated to the franchise license only.
iv. Consequently, the P150,000 is recognized as revenue when the equipment is transferred
to the franchisee, on Feb. 1, 20x1.
The P300,000 is deferred and amortized over the license period, in this case, starts on
Mar 1, 20x1.
b. Journal entries in 20x1

Jan 1, 20x1 Cash P450,000

Contract Liability P450,000

Feb 1, 20x1 Contract liability 150,000

Revenue 150,000

Dec 31, 20x1 Contract liability 25,000

Revenue 300,000 x 10/120 25,000

Dec 31, 20x1 Cash 60,000

Revenue (5% x 1,200,000) 60,000