PROBLEM 1

Mikasa Inc enters into a franchise agreement on December 31, 20x1with Eren Co,
giving Eren the right to operate as a franchise of Mikasa for 5 years. Mikasa
charges Eren an initial franchise fee of P500,000 for the right to operate as a
franchisee. Of this amount, P200,000 is payable when Eren signs the agreement,
and the note is payable in 5-annual payments of P60,000 every December 31. As
part of the agreement, Mikasa will help Eren in the site location, 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
Mikasa’s products. Similar training services and equipment are sold separately
by Mikasa. Eren also promises to pay Mikasa ongoing royalty payments of 1% of
its annual sales, payable each January 31 of the following year and is obliged
to purchase products from Mikasa at their stand alone selling prices at the
time of purchase. The imputed interest for a loan of this type is 8%. The
present value of an ordinary annuity of 8% for five periods is 3.9

Mikasa normally provides training for P100,000, costing P70,000, and sells
equipment costing P100,000 for P140,000. The equipment is installed on
January 15, 20x2. A soft opening of the store commences on February 2, 20x2,
after Mikasa finishes 80% of the required training for Eren to fully operate.

How many performance obligations exists in the contract?

Determine the revenue to be recognized on February 1, 20x2.
Assume the training is completed during the year and Eren reports sales
revenues of P1,000,000, determine the net income of Mikasa from its franchise
with Eren.

PROBLEM 2
ABC Company, a franchisor, provides a range of computer services (hardware and
software installation, repairs, network solutions and the like) to customers.
Each franchise agreement gives a franchisee the right to open a similar store
and sell ABC Company products and services in their area for 5 years. Under the
contract, ABC will provide the franchisees with a number of services to support
and enhance the franchise brand, including:
a. Advising and consulting on the operations of the store;
b. Communicating new hardware and software developments and service
techniques;
c. Providing business and training manuals; and
d. Advertising programs and training.

As an almost entirely service operation, ABC provides few upfront services to

franchisees. Instead, the franchisee recruits service technicians, who are
given ABC training materials (online manuals and tutorials), which are updated
for technology changes, on a monthly basis as a minimum.

ABC enters into a franchise agreement with XYZ Company on December 15, 20x7,
giving a franchisee the rights to operate an ABC franchise for 5 years. ABC
charges an initial franchise fee of P500,000 for the right to operate their
franchise, payable upon signing the contract. ABC also receives ongoing
royalty payments of 7% of the franchisee’s annual sales, payable every January
15, the next year. The franchise began operations in January 20x8 and
recognizes P850,000 revenue for the 20x8.
What is the revenue dfor 20x8?

PROBLEM 3
ABC School is a franchisor that grants franchisees to operate as a mathematics
enrichment centre. Each franchise agreement gives the franchisee the right to
open an outlet and provide services in the area for a period of 5-years. Under
the contract, ABC also provides the franchisee with a number of services to
support and enhance the franchise brand including giving consultations on the
business operations; communicating upgrades in the curriculum and teaching
techniques; and providing trainings and materials needed for their operations.
 
The franchisees employ instructors will be trained by ABC, are given
instructional modules and are regularly updated for changes, at least on a
monthly basis.
 
ABC enters into a franchise agreement on December 31, 20x8, giving a franchisee
the rights to operate as a franchise for five years. ABC charges an initial
franchise fee of P1,000,000 for the right to operate as franchisee, payable
upon signing the contract. ABC also receives ongoing royalty payments of 5% of
the franchise’s annual enrolment(payable each January 15, of the following
year).
What is the franchise revenue on December 31, 20x8?
What is the franchise revenue on December 31, 20x9 if the franchisee reports
revenue P15,000,000 for 20x9?

PROBLEM 4
ADINAYK a sports clothing line designer has a worldwide recognized brand. A
global manufacturer contracts with the designer to collaborate for the right to
use its brand name on shoes that they produce. The terms of agreement provide
the shoe manufacturer with rights to use the brand name on the shoes for two
years. ADINAYK will receive P12,000,000 upfront and 15% of all proceeds from
the shoe sales that included their brand. The shoe manufacturer will provide
updated sales estimates on a quarterly basis and actual sales data on a monthly
basis. The contract was signed and commenced on August 30, 20x1 and sales for
the months September to December amounted to P25,000,000. December sales
amounted to P8,000,000 and royalties for this month are yet to be received by
ADINAYK.
How much is the revenue earned for 20x1?

PROBLEM 5
KAINAN grants a franchisee the right to operate a small restaurant in a
specific local market using KAINAN’s brand name, concept and menu for a period
of ten years. The entity commonly conducts advertising campaigns, promoting
the brand name, and the general restaurant concept. The franchise will also
purchase kitchen equipment from the entity. The entity will receive P9,500,000
for the franchise right, including kitchen equipment costing P500,000, plus a
royalty paid quarterly, based on 5% of the franchisee’s sales over the life of
the contract. Operation with one of the franchisees commences on November 1,
20x1, generating sales of P5,000,000 as of December 31, 20x1.
Determine the revenue for 20x1.

PROBLEM 6
On January 1, 20x1, ABC Company entered into a franchising contract with XYZ
Company for P10,350,000. The term of the agreement will last for 4 years from
the date of the contract. XYZ paid a non-refundable down payment amounting to
P2,070,000 and signed a non-interest bearing note for four annual payments of
P2,070,000 with the first payment due on December 31, 20x1. XYZ can borrow
money at 16%, the present value of the note is computed at P5,796,000. In
addition, XYZ is to pay an annual sum to ABC equal to 5% of their net sales.
Direct costs incurred by ABC to fulfill the contract amounted to 3,105,000,
while indirect costs amounted to P200,000. Net sales of XYZ for the year
amounted to P4,000,000.

Assume that the franchise agreement restricts XYZ to operate only in a

certain area which does not define how the performance obligation is
satisfied, how much is the franchisor’s net income for 20x1?

Assume that the franchise agreement provides that XYZ is granted the right to
obtain any benefits from further modification made to the intellectual
property of ABC, how much is ABC’s net income for the year ended December
31, 20x1?

PROBLEM 7
XYZ Company charges an initial franchise fee of P50,000 for a new franchise,
providing the initial training, equipment and furnishings that have a
stand-alone price of P50,000. The company also receives P30,000 per year for
the continued use of the name and for continuing services to be provided by XYZ
from the purchase of the franchise. A franchisee purchased the franchise on
July 1, 20x8 and started operations on August 1, 20x8 after training was
completed.
How much revenue will be recognized by XYZ in 20x8?

PROBLEM 8
MC Inc charges an initial franchise fee of P1,940,000, with P500,000 paid when
the agreement is signed and the balance in five annual payments. The present
value of the future payments discounted at 10% is P1,091,740. The franchisee
has the option to purchase a P240,000 equipment for P190,000. MC Inc has
substantially provided all initial services required and collectability of the
payments is reasonably assured.
What is the amount of revenue from franchise fees?

PROBLEM 9
APOL charges an initial franchise fee of P1,600,000, requiring a P320,000 down
payment when the agreement is signed and the balance is accounted in four
annual payments. The present value of the annual payments, discounted at 10%
is P1,014,000. An additional part of the initial franchise fee is for
advertising to be provided by APOL for the next five years. The value of
advertising is P1,000 a month. Collectability of the payment is reasonably
assured and APOL has performed all the initial services required by the
contract.
How much revenue from the franchise fee is to be recognized when the
agreement is signed?