Name: ________________________ Class: ___________________ Date: __________ ID: A

Accounting for Franchise Operations- Franchisor

True/False
Indicate whether the statement is true or false.

____ 1. The current PFRSs do not address the accounting for revenues from franchise contracts.

____ 2. If the nature of an entity’s promise to transfer a license is to provide the customer the right to access the
entity’s intellectual property as it exists throughout the license period, revenue from the franchise contract
shall be recognized over the term of the franchise.

____ 3. Under PFRS 15, revenue is measured at fair value of the consideration received or receivable in the contract.

____ 4. If the nature of an entity’s promise to transfer a license is to provide the customer the right to use the entity’s
intellectual property as it exists at the point in time at which the license is granted, revenue from the franchise
contract shall be recognized at the point in time when the license is transferred to the customer.

____ 5. Under the current PFRSs, intial franchise fees are recognized in full as revenue when there is substantial
performance by the franchisor indicated by the commencement of operations of the new franchise business.

____ 6. If the intellectual property to which the customer has rights will change over the license period because the
entity continues to be involved with its intellectual property, the nature of the entity’s promise to transfer the
license is most likely a “right to use.”

____ 7. If, at the contract inception, the entity determines that the collectabiltity of the consideration in a franchise
agreement is significantly uncertain, the entity may recognize revenue from the contract using either the
installment sales method or the cost recovery method.

____ 8. If the intellectual property to which the customer has rights will not change over the license period, the nature
of the entity’s promise to transfer the license is most likely a “right to access.”

____ 9. The third step in the recognition of revenue under PFRS 15 is to identify the contract with the customer.

____ 10. If the promise to transfer the license is not distinct, the entity treats all the promises in the contract as a single
obligation. The entity shall apply the specific principles in PFRS 15 to determine whether the license
provides the customer a “right to access” or a “right to use” the entity’s intellectual property.

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Name: ________________________ ID: A

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 11. Use the following information for the next two questions:

On March 1, 2020, Franchisor Co. enters into a contract with Franchisee Co. The franchise contract gives
Franchisee Co. the right to use Franchisor’s trade name and the right to sell Franchisor’s products for a
period of 4 years. The franchise requires payment of an upfront fee of P1.5 million, payable at contract
inception, and 3% of future sales of the products, payable at each month-end.

The franchise contract requires, Franchisor Co. to undertake activities that would further improve its brand
and its products, to which Franchisee Co. has rights, by continuously undertaking research and development
projects and marketing and promotion activities. Although those activities do not result in the tranfer of a
good or a service to Franchisee Co. as those activities occur, it is expected that Franchisee Co. will benefit
from those activities.

All of the necessary preparations were completed, and Franchisee Co. started operation, on March 31, 2020.

How should Franchisor Co. recognize revenue from the P1,500,000 initial franchise fee?
a. Recognize the P1,500,000 intial c. Recognize the P1,500,000 intial
franchise fee as revenue in full on March franchise fee as revenue throughout the
1, 2020. license period.
b. Recognize the P1,500,000 intial d. Any of the above, as a matter of
franchise fee as revenue in full on March accounting policy choice.
31, 2020.

____ 12. How should the Franchisor Co. recognize revenue from the 3% of sales continuing franchise fee?
a. Franchisor Co. shall estimate the variable c. Franchisor Co. shall estimate the variable
consideration and amortize it as revenue consideration, subject the estimate to the
over the license period. “Constraining esimates of variable
consideration” principle of PFRS 15 and
amortize it as revenue over the license
period.
b. Franchisor Co. shall recognize revenue d. Franchisor Co. shall discount the amount
equal to 3% of Franchisee’s sales as and determined in choice (c) above and
when those sales occur. amortize it as revenue over the license
period.

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Name: ________________________ ID: A

____ 13. Use the following information for the next three questions:

On December 1, 2019, MANOR Co. granted a 5-year franchise right to CANDOR, Inc. for an initial
franchise fee of P400,000. The non-refundable initial franchise fee was collected in full upon signing of the
contract. As of December 31, 2019, MANOR has no remaining obligation or intent to refund any of the cash
received, all of the services pertaining to pre-opening activities to set-up the cotract have been performed and
there are no other material conditions or obligations required of MANOR under the franchise agreement.

If the promise to grant the franchise right is not distinct and that the performance obligation is satisfied at a
point in time, how much revenue shall MANOR recognize in December 31, 2019?
a. 400,000 c. 0
b. 800,000 d. None of these

____ 14. If the promise to grant the franchise right is distinct and that the grant of franchise provides the customer the
right to use the entity’s intellectual property, how much revenue shall MANOR recognize in December 31,
2019?
a. 400,000 c. 0
b. 800,000 d. 6,667.67

____ 15. If the promise to grant the franchise right is distinct and that the grant of franchise provides the customer the
right to access the entity’s intellectual property, how much revenue shall MANOR recognize in December
31, 2019?
a. 400,000 c. 0
b. 800,000 d. 6,667.67