UNIT 7: FRANCHISE ACCOUNTING

1llustrative 1 (Accounting for Franchise Fees)

On January 1, 20x1, TAMISHA Co. grants a franchisee the right to operate a restaurant in a specific location using
TAMISHA's trade name, concept and menu over a 10-year period. The franchise agreement states an upfront fee of
P1,200,000, which includes P200,000 for kitchen equipment that ABC will purchase for the franchisee, plus 10% royalty
based on the franchisee's sales. The P200,000 amount reflects the stand-alone selling price of the equipment. to for
TAMISHA regularly undertakes activities such as marketing research, product development, advertising campaigns, and
implementing operational efficiencies and pricing strategies to support the franchise name.
TAMISHA delivers the equipment on February 1, 20x1. The restaurant opens on April 1, 20x1, at which date the license
period starts to run. The franchisee reports sales of P9,000,000 for the year.
Requirement: Provide the journal entries.

Illustrative 2 (Initial Services)

On Dec. 1, 20x1, TALULA Co. granted a customer a franchise license to use TALULA's trade name and sell TALULA's
products for 5 years. The contract requires an upfront fee of P120,000 and monthly royalty fees of 3%of sales. The upfront
fee is non-refundable
TALULA Co., as a franchisor, has developed a customary business practice to undertake the following pre- opening/setup
activities:
a. Assistance in site selection and fitting-out of thepremises
b. Management and staff training
c. Advertisement and promotion
Preparations for, and execution of, the grand opening

TALULA Co. does not provide the pre-opening/setup activities separately from the granting of franchise rightand the
franchise agreement does not state separate feesfor these activities. TALULA regularly conducts nationaladvertising
campaigns to promote the trade name.
The franchisee started operations in December and as ofDecember 31, 20x1, TALULA has no remaining obligation or
intent to refund any of the cash received. All the initial services (i.e., the pre-opening activities) have been performed.
The customer reported sales of P2,000,000 in December 20x1.
Requirement: Provide the journal entries.

Illustrative 3 (Revenues and Costs)

On Dec. 1, 20x1, SIMONE Co. grants a customer a license to use SIMONE’s patented technology over a 4-year period.
The contract price is P1,000,000, payable in full at contract inception. During Dec. 20x1, SIMONE Co. incurs direct
contract costs of P120,000 and indirect costs of P30,000. The customer obtains control of the license onJan 2, 20x2.
Case 1: Right to use
The license provides the customer the right to use SIMONE’s intellectual property as it exists at the time the
license is granted
Case 2: Right to access
The license provides the customer the right to access SIMONE 's intellectual property as it exists throughout
the license period. SIMONE uses a time-based method in measuring its progress towards the complete
satisfaction of the performance obligation.

Requirement: Provide the journal entries.

1llustrative 4 (Financing Component)

On Jan. 1, 20x1, NALA Co. enters into a Contract with a customer to transfer a license for a fixed fee of P100,000 payable
as follows:
➢ 20% upon signing of contract.
➢ Balance due in 4 equal annual installments starting Dec. 31, 20x1. The discount rate is 12%.
NALA incurs direct contract costs of P20,000 in 20x1. NALA transfers the license to the customer on Jan. 3, 20x2. The
license provides the customer with the right to use NALA's intellectual property as it exists at grant date.

Requirement: Compute for the profits in 20x1 and 20x2 respectively.