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    Chapter 5 Contract With Customers-Franchise and Consignment

    Uploaded by

    Nichole Joy XielSera Tan

    Copyright:

    © All Rights Reserved
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    — Chapter 5 Revenue Recognition — Contract with Customers: Franchise and Consignment Introduction Franchise When one party (franchisor) grants business rights ta 6, perty (ranchisee). questions arise cance peraie 9 franchised business to another. ald oF promised ining the accounting status of the Initial consideration O10 the ditallon of the contract, ese question: are prompled oy, Ing '0 the Collectibility of receivabies vom the franchisee ond the casr a performance ar obilly to pertarm required seniear on {he por of the franchisor. A auited in making such determinations. alinougn. evens a0 Sandor: on this topic provide broad guieiines the generol criteria for revenue recognition gover the accountant's actions specific cases, Gaame Grrangements the delivery of the goods by the manulacturer (wholesaler) to the deoler Htetaiter iz no! considered to be ot the F ne act os on agent for ‘gnor in selling the merchandise, Boin Consignor and consignee are inierested in ne ie former to make a profit of develop a market, the latter fo make a commission soles, Franchise. Accounting Alronchise ‘Agreement involves tha ‘gfanting of business rights the franchisor t thet will ‘Operdle the franchise outlet In ‘ceflain peogrennery ine or ri dad Sconeniine: Four types of franchise onangements have evolved; Manutociurar-ratalier, Manutocturer-wholesater, Service spontor-tetailer, ond Wholescleretotier 3I3 [Se ements, the franchisor, such os Jollibee and Chowkin I a ee pe clic an indiviguel. © Fight 10 sell he franchisor's products OR TS 10 the fone ected gered of time. the franchisor also typically provicles initial stori-up sere tng £2 oiPthing locaters, emocelng of constructing focities, selling equipment core! (ck Painrg io ine Fonchisee] a: well of providing ongoing products and services (uch os fetsing brended products ond advertising and administrative services), So. a franchise [eoTchag Revie to ure the fonchiser’s Intellectual property, Dut alsa involves intial sores gh "Ves nd yervices as war! os ongoing soles of products ond services. The franchisor myer SUCH coen pot of the Fanchise mangement to identity Ihe performance obligation” se agreements vary but usvaily involve an initial payment (colled an initia, eee and ongoing payments of continuing franchise fees. Fer the initig| fonchisa Say ine tonchizar (the porly who gron's business iights under the franchise) nermaily prone ee roncnisee (the oo7y wha operotes the onchised business) with the folowing senrecoe! Me |. Assistance in ste se¥ection : a. Analyzing locafion b. Negotiating lease ‘ 2. Evalvation of potenticl Income 3. Supervision of construction activity 9, Obfgining financing b. Designing building c. Supervning controcter while building 4. Assfonce in the acquisition of signs, fixtures, and equipment 5. Provision of bookkeeping and advisory services G. Setting up tranchiee's records b. Adwiing on income, real eslate, and other taxes © Agviting on local regulations of the franchisee’s business 6 Provision of employee and management treining 7, Provision of quality central PERS 15 on Franchise Arrangements identities two sources of revenue: + Sole of initial franchises ond related assets or services, and * Continuing fees based on the operations of franchises, Pedormance obligations relate to: + Righi lo open a business * — Use of trode name or other intellectual property of the franchisor. * Continuing services, such os marketing help, training, ang in some coses supplying inventory and inventory management. Franchisors commonty charge on initial franchise fee and continuing franchise fees 1 initial franchise fee (poyment far establishing the relationship and providing some initial services) 2 ‘Continuing fronchise tees received @. in return for continuing rights granted by the agreement b. For providing management training, advertising and promotion, lego! ouistance, and other support, ‘Consignment cof Wife A Consignment contiitutes the tronsfer of ession of merchondise without the transfer trom the owner, called the consignor, to. Serer person, called the consignee The conte ach SF an ogent in behalf of the Consignor for the purpose of selling the goods for ac {ne shipment of goods fo the consignee is no! heated of a sale. Although o yang oe ond Nas taken piace. il is no! the intent of either he Consignor or the consignee ‘Tt coon Beachose transactions ke place. Tie of the goods remains with the consigner. © {he tole ts detemed until goods are transfered to 0 third party by the consignee. as Rever ution - Contract with Customers: Franchize and Cons! onsignor, nue rat eg oe on auet merchandise Is comied throughout the consignment at i onsignee has liability for the nt ly classified a3 Merchandite Inventory on Consignmer onthe eansignee’s book? ncn sale of the merchandize, the pet amount due the consignor. Consignment Accounting 3 y J customers, the nen an entity déivers Is product to a dealer for diskibuter for sale to en aa any need 19 determine whetnor the commacl & a ale or a consignment rrangem disteout ognize reverie product is ms Fes oblorsed contol ot Sipced or doe otto ne eote? or hos obtained con sninge: eller ' the oe distributor (depending oh the terms of the contract.) ET INT The dealer or distributor Recognize revenue when the Lisp en or ae ree Tee eine ea. Brame Pe tronecisa peatorner of the product or when the deoler or distributor obtains contro! of the product (i.e. after a wwecified period of time expires]. ‘A. common principol-agent relationship involves consignments. In theve caves, manulactuters for wholesalers) deliver goods but retain fille ta the goods unfil they are sola Rights ond Responsibilities of the Consignee Before goods are transfered on consignment, a wiltten agreement snould ipacify clearly the intent of he parties. The agreamant smould address such Issues os thé omount and type of the consignee's @xpemes to be reimbursed by the consigner. how the consignee’s commissions are to be Computed. when commissions are to be. paid, the credit terms ang conditions, if any, to be considered by the consignee in gronting cfedit, and the responsibility for collection of receivables. The agreement should be complete ond attempts to avoid potential points of Contlict, For items not provided far in the agreement that result in litigation, tne laws af bollment ond agency apply. Accounting by the Consignor ne Journal eniies to be made.on the books of the Consignor vary. depending on: with the ‘egular occount Balances. and Whather a perpetual or periodic inventory system. isusecd. Becaute title 10 ime merchandise is held by. the consignor but physical Possession is neid Somsgnee, special “occouniing records mus! be marntennea By Me eee ee oe ansignee, Upan thioment of jablihed on the consignar's contral records fod receivable dolonee by the consi ‘Consignor recognizes the yale as revenue ac; ¥ goor, When o sae 318 ers signor's: Consignor signment transactions recorded separately ~ thls mathod ‘Shorate from regula’ sales. An Inventory accguae tt Mines call consignment profit co gay on Consignment is wed fo record transactions in relation to Conger’? 9 hg inventory on consignment accounts dabited for on On ast at goods shipped on consignment 5 1 ER Set related to consignment incured by the Consignor 1 E&tbonoble expenses related to consignment paid by the con: ‘Sn Consignment account is credited for: signee, OY cost of goods retumed by the consignee 2 Egit of Consignment sales ond expenses relating to consignment, 2. Contignment transactions nat recorded separately — consignment tra Tented ike a reguior type of sales. Determination of consignment pray oe Pot reeed because It Is olreody part of he profit of the entire entity, Accounting by the Consignee accounting procedures established Dy: the consignee must recognize that goods Acco vmnan| oe no! owned. However, Gs noted earlier, Ihe consignes must: fecelved an ye oe nin recaras and conirais that permit the identification of, @. Goods held on consignment and i D oReistes receivables and reimbursable expenses, and «Prepare periodic reports, The consignee normally creates a specio} Consigner Receivable or Consignor Payable account: Consignee’s ment ansoctions recorded separately — under this method, two accoy 1. Consign oeeeeded to be mainiained in relotion to Consignment transactions: Consignor recaivapie account Is: Ov ebired ior expenses paid by the consignee but chargeable to the consignar * credited when remittance is made to the consignor Consignor payoble Gecount Is: = credited for the scies by the consignee debiled when remittance is made by the consignor 2. Consignment transactions not ecorded separately — consigamen! transaction: oe weoted like @ regular type of sales. Determinotion of consignment profit is not fequied becouse if is already part of the profit of the entire entity. eparately, because it is more convenient results of operations. illustrations in this chapter show transactions recorded 5 ‘on ihe consignor and consignee's books to Getermine the remains and fot 1 which fs sirlit 10 Consignment Sales The accounting procedures regarding consignment soles under PFRS 15 # purpese: of overview regarding the application of PFRS 15 en consign™men Pas 18 ore a3 follows: woods untl mer s Monufociurers (or wholesalers) deliver goods but retain fille to the ng ore sold toecied. 1 Tee. monutacturer or wholesaler ships merchandise to NE COMSINSE crsignes wha Ht to del as on agent for the consignor in selling he merchandise. makes a commission on the sale. + Consignor make! @ profit on the sale and cormies merchandise ae went: Reverse ion — Contract with Customers: Franchise and Cons Franchise items 1 to § are based on the following information: me that Antoniech starts selling TechSiop franchises. TrueTech bah es franchiseesan initialfee in exchange for (a) the exclusive right to opere eS: ent only TechStopin 9 particular crea for a five-year period, equip necess : re in ets, and {c} training services ‘ary to distributeand repair AntanTech products. 31 4c) fraining can be to be provided over a two-yearpernad, Similar equipment purchased elsewhere. 1, How many petomrance: obligations exist in i contract? qs Ge 1 ia d 3 2. AntonTech should recognize revenve for the right fo operate o Techshop? @. No transaction c. Point in Time b. Norevenve d. Over Time 3. AntonTech should recognize revenue for the equipment? a. Neo transaction c. Point in Time b. Norevenve d. Overlime .4, AntonTech should recognize revenue for the training? g. No transaction ¢. Point in Time b. Norevernue d. ‘OverTime 5, What if Antontech also charges franchisees an additional fee for ongaing SOVIGSs PME yy the company, the addifional fee be recognize as revenue’ a. No transaction c. Point in Time b. Norevenue d, OwerTime items 60 8 are based on the following Information: Dominador's Pizza inc, entersinto o franchise agreement on December 31, 20x7. giving Coming Corp. ine fight to operate os & franchisee of Dominador's Pizza for 5 years, Dominador's charges Doming an initial franchise fee of 475,000 for the fight to operate as o franchisee. Of this amount, P!90,000 Is payable when Boming oor sors the agreement, and the bolance is payable in five annual payments of P57,000 each on December 31. Somider the following for allocation of the transaction price at December 31, Rights to the trade name, market area, technical and proprietary know-how Services - training.e Ic. ..... Machinery and equipments, etc. (costing, P95,000) 133,000.00 Total transaction price 2 318 The credit rating of Dominga indicates that money can be bor Bissent valve of an ordinary annuity of five annual recelpis ort TONS the Bie ounted at 8% is P227.591.50. The discount of P57,408.50 represent; 7 sn fevenue fo be acerved by Dominador's Pizza Inc. over the paymone interes! Petiog Troining is completed in January 20x8, the equipmentis installed in J : and Doming holds grand opening on February 4, 20x8. On Februaney! 208 + 208) franchise opens. Doming also promises to pay ongoing royalty payments of 1% foovasie every Jonuary 31 of the following year) ond is Oho, ATUL cing products fram Dominadors at its current stand alone selling prices af wichase of purchase. : OT the time 6. How many performance obligations exist in this contract o. 2 G 4 for franchisee b. 3 a § 7. When Dominador should recognize revenue for the rights the trade name, morket crea and proprietary Enoeehion Ge = to a single performance obligation? ive rise a. No transaction c. Point in Time b. Norevenue d. OverTime How much revenue [franchise revenue, service revenue and sales revenue 8. machinery and equipments) be recognized on December 31, 20x77 c. P133,000.00 a. lero. b. P 74,591.50 dd. -P1 90,000.00 9. Howmuchrevenve [franchise revenue, service revenue and soles revenue -mochinery and equipment) be recognized on February 4, 20x87 a. P 94,591.50 c. P190,000.00 b. P133,000.00 d. P417,591.50 ed on December 3!. 10. How much continuing franchise revenue be recognize j 20x8. assuming the sales of P4,987,500 was generated for the first year 0! P190,000.00 operations # a. Zero. c d. P417.591.50 b. P 48,875.00 Recognition of Franchise Rights Revenue Over Time franchisor MOY, be @ rights. the franchise fering contral of ter than! Depending on the economic substance of th over time. providing access to the right rather than trans! fights. in this case, the franchise revenue is recog! point in time. 319 Revenue Re uation — Contract with Customers Franchise and Ci tems 11 to 14 are based on the following information: xaviery COMpUtENS is G franchisor and provides a range of computing services pordwore/software installation, repairs, data backup. device syncing. ond network solutions) on popular Samsung, Dell, Acer and other PC devices. Each franchise agreement gives a franchisee the night to open a Xaviery outlet ond sellXavierys' products and services in the araa far five (5) years. Under the contract xaviery also provides the franchisee with a number of services to support and enhance the franchise brand. including: * advising and consuiting on the operations of the store: * Communicating new hardware and software developments, and service techniques; * — providing business and training manuals: and * |@dvertising programs and training. As an olmost entirely service operation {all materials and other supplies ore purchased as needed by customers), Xaviery provides few upfront services to fronchisees. Instead, the franchisee recruits service technicians, who are given Xavierys’ training materials [online manuals and tutorials). which are updated for technology changes, on a monthly basis at a minimum. Xoviery enters into @ franchise agreement on December 15, 20x7, giving a franchisee the rights to operate a Xaviery franchise in Cagayan Valley for five (5) years. Kaviery charges on initial franchise tee of P975,000 for the right to operate 98 a franchisee, payable upon signing the contract. Xaviery also receives ongoing royalty payments of 7% of the franchisee’s annual sales (payable each January 15 of the following year). 11, How many performance obligations exist in this contract for franchise? a. None c 2 b. 1 qd 3 12. The franchise revenue should be recognized: a. No transaction ¢. Point in Time b. Norevenue d. Over lime 13. The franchise revenue on December 31, 20x7 should be: a, None c. P 975,000 b. P195,000 a. P1.160,250 14, The franchise revenue on December 31, 20x8 should be: a. P 195,000 c. Pt.160.250 b, 975,000 d. P1.355.250 520. : bosed on the following Information: (sells franchise arrangements throughout Luzon ang vi ement, Joey receives P600,000in exchange for sayy formance obligations: sal five-year right to operate asa Jor ‘i tin on exclusive sales territory ey Monitor Muth initial training ond certification aso Joey Mo, Nite 1sto 10 ore ney monitor M fie ra franchise core" the following separate Pe «franchisees have retail establishment * franchisees receive Machanic, and franchisees receive aJoey Monitor Mutfler building and ne, equipment. Cestary _gione sefing price of the initial training ond certification js Py 1 the building and equipment. Joey estimates the stand ) he five-yeor ight to operate as a Joey Monitorestabiggn jeproach. Joey Monitor received P75,000 on July 1, 20x4 Suhas ond accepted a note receivable for the rest of the franchise price, trom Monitor will construct and equip Altheas' building and train and Certify Aline by September }, and Altheas* five-year right to operate as q 4, a Monitorestabiishment will commence on September | as well, Oey What amount would Joey calculate as the stond-olone selling pri¢e of he The stand: and P450,000 for selling price of tl using the residual o} 15. five year right to operate os 0 Joey Monitorretail establishment? a. 135,000 c. P585,000 b. 150,000 d. 600,000 1. Whatjoumal entry would Joey Monitor record on July 1, 2014, torefiect the sate of a franchise to Althea? a. Cash .... 600,000 Uneamed franchise revenue 400,000 b. Cash.. 75,000 Notes receivable 525,000 Uneamed franchise revenue 600,000 ¢ Cash... 75,000 Notes receivable 525,000 Franchise revenue .. 75,000 Uneamed franchise revenue 525,000 dg. Cash .. Soon Notes receivable .. S254 Franchise revenue seme WH ‘ i ize in the year ended jow much revenue would Joey Monitor recognize in t ve ath alinedt December 31, 20xé, with respect to its franchise arangeme {ignore any interest on the note receivable.) a P 9000 c. 465.000 b. PA50,000 dd. P474,000 = : ama 1B opChop sat haintying franchises, tophop receives P5000 TET TN franchisee for providing initial training. equipment receives P30,000 per tand-alone selling price of P50,000. TopChap also sy ices ves ee use of the lopChop name and for ongeing SE Chon (starting on the date the franchise s purchased). Cartes bec ted fairing franchisee on July 1, 20x4, and on August 1, 20x. hod reel Chop and was open for business. How uel revarwe in 20x6 Pp gnize for its arongement with Carlos ee Te : c. P65,000 b. P10,000 d. P70,000 19, Pita Pal sells fast-food franchises. Pita Pal receives P75,000 from a ae franchisee for providing initial training. equipment, and fumishings tha’ together have a stond-aione selling price of P75,000. Pita Pal also receives P34,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 20x6, and on May 1, 20%4 Rachel had completed training and was open for business. How much revenue in 20x6 will Pita Pal recognize for its atangement with Rachel? a. Tero ec. P 99,000 b. P75,000 dg. P111,000 items 20 and 21 are based on the following Information: 20. Hotel Dian Inc. charges on initial franchise fee of P?0,000 broken down as follows: Rights to trade name, market area, and proprietary know-how P.40,000, Training services 11,500 Equipment (cost of P10,800) 38,500 Total initial franchise fee P90,000 Upon signing of the agreement, a payment of P-40,000 is due. Thereafter, two annual payments of P30,000 ore required, The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1. 20x4, and the: franchise commences operation on November |, 20x4. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 20x4 would Include : 2. a credit fo Uneamed Franchise Revenue for P40,000. %. a debit to Service Revenue for F11,500, ©. 9 debit fo Sales Revenue for P38_500, da. adebit to Unearmed Franchise Revenue for P40,000, 322 2. ing that the franchise agreement is signed on August 1, Scie commences operation on November 1, 20x5, ASSurme, ON the total training fees includes training services for the period leagimn® Mat the franchise opening [P5.500 value) and for 3 months following ots The journal entry on August |. 20x5 would include o credit to Uneamed Service Revenve for P11,500, ocregit to Uneomes Service Revenue for P4000, ao debit to Soles Revenue for P38,500. a. debit to Unearned Franchise Revenue for P40,000, pogo On Janvery |, 20x5 Dairy Treats, Inc. entered into o franchise Ogre with @ company allowing the Company tb do business under Dewy nent name. Dairy Treats had performed substantially oll required tence! January |, 0x5. and the franchisee peid the initial franchise fee of pane eY in full on that date. The franchise agreement specifies that the frars must pay a continuing franchise fee of P72.000 annually. of which ane Mee be spent on advertising by Dalry Treats. What entry should Dairy re on Jonuary |, 20x5 to record receipt of the initial franchise tes anv continuing franchise fee for 20x52 the a. Cash .. are 912,000 Franchise Fee Revenue... Revenue from Franchise Fees peed b. Cash. 912,000 s Uneomed Franchise Fees 912000 c. Cash... 912,000 Franchise Fee Revenue 840.000 Revenue from Franchise Fees .. 57,600 Unearned Franchise Fees 14,400 d. Prepaid Acvertising .. 14,400 Cash ... 912.000 Franchise Fee Revenue 840,000 Revenue from Franchise Fees 72,000 Unearmed Franchise Fees .. 14,400 » Wynne inc. charges an initial franchise fee of P1,840,000, with P400,000 paid when the agreement is signed and the balance in five annuai payments. The present vaive of the future payments, discounted at 10%. is P1,071,744 The franchisee has the option to purchase P240,000 of equipment for °192.000. Wynne has substantially provided all initial services required Collectibiity of the payments is reasonably assured, The amount of revenv® from franchise tees: a. P 400,000. Cc. PIA91,744. BP l443,744, d. P1.840,000. 323 Revenue Recognition = Contract with Customers: Franchise and Consignesent ise, with P320.000 24, Pasta Inn chrages an initial fee of PI 400,000 for a dieledere four onnual " paid when the agreement is signed and the Sey iodct \O% is payments, The present value of the onnuai payments, 960.000 of kitchen P 1,014,000. The franchisee has the right to purchase T the initial fee is equipment ond supplies fer P'S0,000. An additional part one Meck We for acivertising to be provided by Pasta inn during the ne» the payments is value of the advertising is P1,000 a month. Collectibility of Ot een feasonably assured and Pasta Inn has performed ail the ini required by the contract, . it How much revenue from franchise fee be recognized when the agreement is ed? as Tero c. P1,S?0,000 b. P1,264,000 d. P1,600,000 Hems 25 and 26 are based on the following information: frozen Delight, inc. char rges on initial franchise fee of P75,000 for the right to operate as a franchisee of Frozen Del: immediately. The remaind: light. Of this amount P25.000 is collected ler ts collected in four equal annual instalments ot P12.500 each. These install 25. The amount of revenue trom training and franchi a. Tero, ise-On April 1, 20x5 to: c. P66,402 b. Pé4.402 dd. P75.,000 26, The amount of revenue from training and franchise on duly 1, 20x5 to: a, Zero, Cc. Péd.402 bb. Ped402 d. P75,000 Nems 27 to 32 are based on the following information: Pacific Crossburgers inc. Charges an initial fee of P70,000, Upon the signing of the agreement (which covers 3 years), a po res GNNUal payments MEN of P28,000 is due. Thereatter, 1 of P1 4,000 are required. The credit fating of the franchisee 'ssuch that it would have to pay interest At 10% to borrow money. The franchise ee Signed on May 1, 20x5, and the franchise commences ‘Operation on ly 1, 20%5, 27. The amount ot fevenue on May |, 20x5 OTe required by the franchisor ‘Ossuming no future i ‘ance the franchise starts 9perations: a. Tero, Cc. Pé2816 b. P28,000 P70,000 a24 2B. Bw. av. a2.

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