Name: Date:

FRANCHISE Score:

1. Franchise revenue are recognized over time if

A. Franchise rights are transferred at a point in time
B. The franchisor is providing access to the right rather than transferring control
C. Performance obligations regarding the franchise rights are completed when the franchise opens
D. The franchise fee is payable upon signing of the contract

2. Franchise fees should be recognized

A. On the date the contract was signed
B. On the date the franchise is opened for business
C. On the date the franchise fee is paid to the franchisor
D. When performance obligations are satisfied

3. Statement 1: Under PFRS 15, revenue cannot be recognized unless the franchise agreement is in writing
Statement 2: There can only be exactly one performance obligation per franchise contract.
A. Both statements are true
B. Both statements are false
C. Statement 1 is true, statement 2 is false
D. Statement 1 is false, statement 2 is true

4. Under PFRS 15, how shall revenue from contracts with customers such as revenue from initial franchise fee be
recognized by the franchisor?
A. Upon receipt of the initial franchise fee by the franchisor.
B. Upon signing of the franchise agreement.
C. When the franchisor satisfies the performance obligation under the franchise agreement.
D. Applying the legality over the substance of the transaction.

5. Under PFRS 15, how may an entity satisfy a performance obligation in a contract with customers?
A. Satisfaction of performance obligation over time.
B. Satisfaction of performance obligation at a point in time.
C. Either A or B.
D. Neither A nor B.

6. PFRS 15 provides that initial franchise fee shall be recognized as revenue over time (percentage of completion
method) if any one of the following criteria provided below is met. Which of the following indicator shows that
the initial franchise fee shall be recognized as revenue at a point in time instead over time?
A. When the franchisee simultaneously receives and consumes the benefits provided by the franchisor’s
performance as the franchisor performs.
B. When the franchisor’s performance creates or enhances an asset that the franchisee controls as the
asset is created or enhanced.
C. When the franchisor’s performance does not create an asset with alternative use to the franchisor
and the franchisor has an enforceable right to payment for performance completed to
date.
D. When the franchisee has legal title to the franchise and has the significant risks and rewards of
ownership of the franchise.

7. What is the measurement of franchise revenue recognized from franchise agreement?

A. Fair value of the consideration received or receivable.
B. Book value of the consideration received or receivable.
C. Carrying amount of the consideration received or receivable.
D. Nominal amount of the consideration received or receivable.
Problems.
Compute the NET INCOME under different scenarios:
a. Collectability of the note is reasonably assured, note is non-interest bearing.
b. Collectability of the note is reasonably assured, note is interest bearing.
c. Collectability of the note is not reasonably assured, note is non-interest bearing.
d. Collectability of the note is not reasonably assured, note is interest bearing.

1. On January 2, 2022, SS signed an agreement to operate as a franchisee of HH for an initial franchise fee of
10,000,000 for 10 years. Of this amount, 2,000,000 was paid when the agreement was signed and the balance
payable in four annual installment beginning Dec. 30, 2022. SS signed a note for the balance. SS’s rating
indicates that he can borrow money at 8% of this type. A 2% CFF is to be paid every month. Services amounting
to 1,293,000 had already been rendered by HH and that additional indirect franchise cost of 272,000 was also
incurred. SS generated a sales of 1,500,000 for the year 2022. Installment payment was made on due date.

2. On July 1, 2016, HH signed an agreement to operate as a Franchisee of DD for an initial franchise fee of
10,000,000. On the same date, HH paid 6,000,000 and agreed to pay the balance evidence by a note in four
annual payments of 1,000,000, beginning July 1, 2017.The collectability of the note is not reasonably assured.
HH can borrow at 14% for a loan of this type. DD rendered initial services so that HH can start their operations.
The total costs of such services is 2,000,000. The franchisor also incurred indirect costs of 50,000.The franchise
agreement further requires the franchisee to pay continuing franchise fee at 5% of its monthly gross sales. The
total sales reported by HH up to December 31, 2016 is 5,000,000. What is the net income of DD for the year
ended December 31, 2016?

3. On January 2, 2016, JJ Company signed an agreement to operate as a franchisee of FF Inc. for an

initial franchise fee of 3,125,000 for 10 years. Of this amount, 40% was paid when the agreement was
signed and the balance payable in four semi-annual payments beginning June.30, 2016, JJ Company
signed a note for the balance. JJ's credit rating indicates that it can borrow money at 24 percent on the
loan of this type. Substantial services costing 802,500 have been rendered by FF Inc.

4. BB Inc. granted a franchise to PP to operate its registered business of barber shop. The contract was
signed on January 1, 2017 with initial franchise fee of 500,000 payable in 200,000 cash and the balance
in five equal semi-annual instalments every June 30 and December 31. The promissory note has
implicit rate of 10%. The contract provided that PP shall pay a contingent franchise fee equal to 5% of
the revenue from the barber shop. PP reported a revenue in the amount of 100,000 during 2017. BB
has substantially performed all the services required under the franchise contract.