BCSVillaluz

INTEGRATED REVIEW IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HAND-OUT NO. 5: Franchising

Problem A:
On January 1, 2022, Dream Beans Inc., a franchisor entered into a contract with a franchisee for the establishment of a coffee shop. The
franchise agreement provides that the franchisee shall pay a non-refundable upfront franchise fee in the amount of P4,000,000 payable
at the date of signing of contract. The franchise agreement also provides for the payment of on-going royalties equivalent to 10% of
franchisee’s revenue. The franchise agreement requires the franchisor to (1) construct the coffee shop; (2) to allow the franchisee to use
the franchisor’s trademark for a period of 20 years from the signing of contract, and; (3) to deliver 100,000 units of raw coffee beans for
the franchisee’s operation.

Based on the evaluation of the contract, it is determined that it is covered by IFRS 15 Revenue from Contracts with Customers. It is
determined that the franchisee’s three performance obligations under the franchise contract are separate and distinct from each other and
need to be accounted for as a separate performance obligations. Moreover, the entity continues to be involved with the main operations
of the franchisor and the intellectual property and it undertakes activities that significantly affect the intellectual property. Based on the
franchisor’s data, it is established that the stand-alone selling prices: (1) Coffee shop construction is P2,500,000; (2) License to use the
franchisor’s trademark is P1,000,000, and; (3) Delivery of raw coffee beans is P1,500,000.

On January 1, 2022, the franchisee paid the initial franchise fee. As of December 31, 2022, the franchisor has completed 80% of the
coffee shop which already allowed the franchisee to operate. During 2022, the franchisor has already delivered 30,000 units of raw
coffee beans to the franchisee. For the year ended 2022, the franchisee reported sales revenue of P250,000. What is the total revenue
to be reported by the franchisor for the year ended 2022?
A. 2,000,000 C. 2,265,000
B. 2,025,000 D. 2,865,000

Problem B:
Pizza Pie Inc. enters into a franchise agreement on December 31, 2022, giving Freshly Bake Corp. the right to operate as a franchisee
of Pizza Pie for 5 years. Pizza Pie charged Freshly Bake an initial franchise fee of P50,000 for the right to operate as a franchisee. Of
this amount P20,000 is payable when the food fight signs the agreement, and the note balance is payable in five annual payments of
P6,000 each starting on December 31, 2023 as part of the arrangement. Pizza helps locate the site, negotiate the lease or purchase of the
site, supervise the construction activity, and provide employee training and the equipment necessary to be a distributor of its products.

Freshly Bake also promises to pay ongoing royalty payments of 1% of its annual sales (payable every January 31) and is obliged to
purchase products from pizza at its current stand-alone selling price at the same time of purchase. The credit rating of Freshly Bake
indicates that the money can be borrowed at 8%. The PV of an ordinary annuity of 5 annual receipts of P6,000 each discounted at 8%
is 23,957. The discount of 6,043 represents the interest each revenue to be accrued by Pizza Pie over the payment period.

The allocation of transaction price is as follows:

Rights to the trade name, market area, and proprietary know-how P20,000
Training services 9,957
Equipment (cost, P10,000) 14,000
Total 43,957

Training is completed in January 2023, the equipment is installed in January 2023, and Freshly Bake grand opening is Feb. 2, 2023. For
the year ended December 31, 2023, the franchisee reported sales revenue amounting to P525,000.

1. What is the journal entry on December 31, 2022?

A. Cash 20,000
Note receivable 23,957
Unearned Franchise Revenue 20,000
Unearned Service Revenue (training) 9,957
Unearned Sales Revenue (equipment) 14,000

B. Cash 20,000
Note receivable 30,000
Unearned Interest Income 6,043
Unearned Franchise Revenue 43,957

C. Cash 20,000
Note receivable 30,000
Unearned Franchise Revenue 20,000
Unearned Service Revenue (training) 9,957
Unearned Sales Revenue (equipment) 14,000
Unearned Interest Income 6,043

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 1 of 5
 BCSVillaluz
D. Cash 20,000
Note receivable 23,957
Unearned Interest Income 6,043
Unearned Franchise Revenue 37,914

2. How much is the total revenue to be recognized for the year 2023?
A. 51,124 C. 49,207
B. 43,957 D. 35,124

3. Assuming the franchisee has the right to access the intellectual property, how much is the total revenue from the
franchise contract to be recognized for the year 2023?
A. 32,874 C. 43,957
B. 530,000 D. 34,791

-END OF HANDOUT-

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 2 of 5
 BCSVillaluz

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 3 of 5
 BCSVillaluz

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 4 of 5
 BCSVillaluz

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____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 5 of 5