AFAR-05 (Licenses, Royalties, Franchises & Consignment)

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 42  October 2021 CPA Licensure Exam  Weeks 5 - 6
ADVANCED FINANCIAL ACCOUNTING & REPORTING A. Dayag  G. Caiga  M. Ngina
AFAR-05: LICENSES, ROYALTIES, FRANCHISES, NON-

REFUDABLE UPFRONT FEE & CONSIGNMENT (PFRS 15)
Licenses
Licenses allow the customer to use the seller’s intellectual property. It is a permission that establishes a
customer’s rights to the intellectual property of an entity. Customers pay a licensing fee to use a company’s
intellectual property (“IP”).
Licenses of IP include:
1. Software and technology
2. Media and entertainment (including motion pictures and music) industries
3. Franchises (to be discussed in the succeeding paragraphs)
4. Patents, copyrights and trademarks.
PFRS preparers do not classify licenses of IP as either functional or symbolic (US Standard used this
classification).
If the promise to grant a license is distinct from the other promised goods or services, it is a separate
performance obligation. Whether the separate performance obligation is satisfied at a point in time or over
time depends on the right conferred.
Under PFRS 15, the application guidance focuses on the characteristics of a license that provides a:
1. Transfer Overtime - Right to Access, (provision of access to IP as it exists (overtime) throughout the
license period).
2. Transfer at a Point in Time - if licensed IP does not have those characteristics/criteria (refer to 1a, b,
and c, below) of overtime, it provides a Right to Use, by default (transfer of a right to use IP as it
exists at the point in time in which the license is granted).
Two types of License:

1. Right to Access (Overtime/OT): Some licenses provide the customer with access to the seller’s
intellectual property with the understanding that the seller will undertake ongoing activities during
the license period that affect the benefit the customer receives.
Revenue for those licenses is recognized over the period of time (overtime) for which access is
provided.
• The key determinants of a license is when a customer gives the right to access (Overtime/OT)
the entity’s IP if it meets all of the following criteria (if these criteria are not met, the license gives
a Right to Use/PT):
a. Contract requires or customer expects that IP will change and customer has right to
changed IP
b. Rights granted by license may have negative or positive effects on the customer
c. No further transfer of good or service (similar to US GAAP).
• A license to access a licensor’s IP is accounted for as a performance obligation satisfied over
time.
Right to access: A license provides a right of access to the seller’s intellectual property if the seller’s
on-going activities affect the benefit the customer receives. Revenue recognized over the period
of time for which access is provided.
Example: a PBA (Philippine Basketball Association) trademark granted to a company over a period
of time. In that case revenue is recognized over the period of time for which access is provided.
2. Right to Use (Point in Time/PT): Some licenses transfer a right to use the seller’s intellectual property
(IP) as it exists when the license is granted. For these licenses, subsequent activity by the seller does
not affect the benefit that the customer receives.
As previously mentioned, if a license transfers such a right of use, revenue is recognized at the point
in time when the right is transferred.
• A license to use an entity’s IP is accounted for as a performance obligation satisfied at a point in

time.
Page 1 of 19 0915-2303213/0908-6567516  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-05
Weeks 5-6: LICENSES, ROYALTIES, FRANCHISES, NON-REFUNDABLE UPFRONT FEE & CONSIGNMENT
Right to use: Transfer a right to use the seller’s intellectual property as it exists when the license is
granted. Revenue is recognized at the start of the license period, when the right is transferred
(revenue recognized at the point in time).A license transfers a right of use if the seller’s activities
during the license period are not expected to affect the intellectual property being licensed to the
customer. Example: a music download
If the IP has significant standalone functionality (i.e., the IP’s form and functionality is not significantly
changed by the above mentioned activities),
PFRS 15 clarifies that the customer derives a substantial portion of the benefit of that IP from that functionality
and revenue is recognized at a point in time.
Sometimes a license is not considered to be a separate performance obligation because it is not distinct
from other goods or services provided in the same transaction.
Applying the licenses guidance to a bundled performance obligation that includes a license PFRS 15 does
not explicitly state that an entity needs to consider the nature of its promise in granting a license when
applying the general revenue recognition model to bundled performance obligations that include a
license and other goods or services.
However, the IASB clarified in the Basis for Conclusions that an entity should consider the nature of its
promise in granting the license if the license is the primary or dominant component (i.e., the predominant
item) of a single performance obligation.
Renewals of IP License
PFRS 15 does not include similar requirements for renewals as US GAAP. Therefore, when an entity and a
customer enter into a contract to renew (or extend the period of) an existing license, the entity needs to
evaluate whether the renewal or extension should be treated as a new contract or as a modification of the
existing contract. A modification would be accounted for in accordance with PFRS 15’s contract
modifications requirements.
1. Which of the following is not true?
a. License fees are recognized over time for any license that is viewed as providing a right of access.
b. Licensing fees are recognized as revenue over time for any licenses for which the seller expects its
ongoing activities to affect the benefits that the buyer receives from intellectual property.
c. License fees are recognized as revenue at a point in time if the buyer expects that the seller’s future
activities will not affect the benefit the buyer derives from the intellectual property.
d. Licensing fees always are recognized as revenue at the end of the license period, when the seller
has completed its performance obligation to provide access to its intellectual property.
Answer: (d) - If the seller provides access to its intellectual property, revenue is recognized over the period of time for which
access is provided, not deferred until the end of the license period.
2. Jennifer Enterprises licenses customer-relationship software to Jenny Company. In addition to providing

the software itself, Jennifer Enterprises promises to provide consulting services by extensively customizing
the software to Jenny’s information technology environment, for a total consideration of P600,000. How
many performance obligations exist in the implied contract when a customer registers for the services?
a. 0 c. 2
b. 1 d. 3
3. DJ Computers licenses customer-relationship software to Jaja Company. In addition to providing the
software itself, DJ Computers promises to provide consulting services by extensively customizing the
software to Jaja’s information technology environment, for a total consideration of P3,456,000. In this
case, DJ Computers is providing a significant service by integrating the goods and services (the license
and the consulting service) into one combined item for which Jaja has contracted. In addition, the
software is significantly customized by DJ Computers in accordance with specifications negotiated by
Jaja. How many performance obligations exist in the contract?
a. 0 c. 2
b. 1 d. 3
Use the following information for questions 6 to 8:
ReSA Associates sells two licenses to ASeR Company on September 1, 20x6. First, in exchange for P100,000,
ReSA Associates provides ASeR with a copy of its proprietary investment management software, which
ReSA does not anticipate updating and which ASeR can use permanently. Second, in exchange for
P90,000, ReSA Associates provides ASeR with a three-year right to market ASeR’s financial advisory services
under the name of ReSA Associates, which ReSA Associates advertises on an ongoing basis.
6. The software license is
a. Right of use c. Either right to use or access
b. Right to access d. Neither

7. The license to use the name, ReSA Associates is:

a. Right of use c. Either right to use or access
b. Right to access d. Neither
8. How much revenue will ReSA recognize in 20x6 under this arrangement?
a. P10,000 c. P100,000
b. P90,000 d. P110,000
9. Tony &Jr. is a CPA firm that provides proprietary software to its clients. One of its software packages sells
for P150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells
for P3,000 and contains Tony &Jr. archive of accounting standards and articles, which Tony & Jr.
updates on a weekly basis and downloads to archive users for the two years following purchase of the
product. If a customer purchases both software packages on June 1, 20x6, how much revenue should
Tony &Jr. recognize for the year 20x6?
a. None c. P 875
b. P 150 d. P1,025
Answer:. (d) - The software license for tutorials is a right of use. The customer does not expect for Tony &Jr. subsequent activity to
change the functionality of the software, so Tony &Jr. However, the license to use the accounting archive is an access right, as
the customer should expect that Tony &Jr. activity during the license period will affect the value of the software to the customer,
so Tony &Jr. should recognize revenue as that access is consumed over 24 months. Since the customer uses the archive software
for seven months in 20x6 (June through December), Smith & Sons should recognize revenue of 7 ÷ 24 = 7/24 of P3,000, or P875 for
that access right in 20x6. In total, Tony &Jr.recognizes revenue of P150 + P875 = P1,025 in 20x6.
10. KImdrei developed software that helps farmers to plow their fields in a manner that prevents erosion
and maximizes the effectiveness of irrigation. Anton paid a licensing fee of P20,000 for a copy of the
software. Although Anton can use the software as long as it wants, KImdrei expects that Anton will use
the software for approximately 5 years. KImdrei does not anticipate any further interaction with Anton
following transfer of the license. How much revenue should KImdrei recognize in the first year of the
contract?
a. Zero c. P 5,000
b. P4,000 d. P20,000
Answer: (d) - Because KImdrei will have no more continuing involvement, the license transfers a right of use, and all license
revenue can be recognized upon transfer of control of the software to the customer.
11. Assume that Pfizer, a large research-based pharmaceutical company, enters into a contract with a
start-up biotechnology company called Chris HealthPro and promises to:
a) Grant Chriis HealthPro the exclusive rights to use Pfizer’s Technology A for the life of its patent. The
license gives Chris HealthPro the exclusive right to market, distribute, and manufacture Drug B as
developed using Technology A.
b) Assign four full-time equivalent employees to perform research and development services for Chris
HealthPro in a specially designated Pfizer lab facility. The primary objective of these services is to
receive regulatory approval to market and distribute Drug B using Technology A. Chris HealthPro is
required to use Pfizer’s lab to perform the research and development services necessary to develop
Drug B using Technology A, because the expertise related to Technology A is proprietary to Pfizer
and not available elsewhere.
Given the information above, how many performance obligations regarding the license and the R&D
services to Chris HealthPro?
a. None c. Two
b. One d. Three
Answer: (b) - The license granted by Pfizer is not a performance obligation, because it is not separately identifiable. The only way
to exploit the license is by utilizing ongoing R&D services from Pfizer. The license does not provide utility on its own or t ogether
with other goods or services that Chris HealthPro has received previously from Pfizer or that are available from other entities.
Rather, the license requires Pfizer’s R&D services and proprietary expertise to be valuable. Therefore, Pfizer would combine the
license with the R&D services to Chris HealthPro and account for them as a single performance obligation.
Royalties - Variable Consideration included in License

Variable consideration is the portion of a transaction price that depends on the outcome of future events.
Royalty payments are not a performance obligation but part of the transaction price (a payment
mechanism). Since, the royalty payment depends on future sales amounts; it represents a variable
consideration and is recognized overtime.
Variable consideration (i.e. royalty fees) must also be allocated:
• If items are priced at standalone value, the royalty fee may be allocated solely to the franchise
license.
• If not, the royalty fee will have to be allocated to any other distinct performance obligations as well.
• There is an exception if variable consideration is based on sales or usage of a license. Those
amounts (often called “royalties”) are only included in the transaction price when the sales or
usage has actually occurred, such that they are known rather than needing to be estimated.

• The term “royalty” is not defined, and there are some cases where it is not clear whether a payment
structure results in the sales or usage- based royalty exception being applied. Certain payment
terms may be “in-substance” sales or usage based royalties, even if the contract does not label
the payments as royalties. In addition there are situations where the amount of consideration is
similar to a bonus and depends on the customer’s subsequent sales or usage, even though the
amount is not calculated on the basis of each sale or usage.
Regardless of whether a license agreement represents a right to access or a right to use the IP, revenue
from sales based or usage-based royalty promised in exchanged for a license is recognized on the later
of the following events:
1. Sales (subsequent) or usage occurs;
2. The performance obligation to which the royalty (sales-based or usage-based royalty) has been
allocated has been satisfied or partially satisfied.)
License with Royalty
Use the following to answer questions 12 and 13:
The ReSA Singing Group League (RSGL) licenses its trademark to ReSA Logo. Under the license
arrangement, ReSA Logo pays the RSGL a P1,000,000 initial license fee plus a bonus when annual sales of
ReSA Logo merchandise reach a threshold. The license agreement is for 4 years.
12. How much of the P1,000,000 initial license fee should the RSGL recognize as revenue in the first year of
the contract?
a. Zero c. P1,000,000
b. P250,000 d. Cannot tell from information given
Answer: b - Because the RSGL’s ongoing activities affect the value of the trademark then should recognize revenue over time.
Therefore, the amount of P1,000,000 initial license fee that the RSGL should recognize as revenue is P250,000 (computed as
P1,000,000 ÷ 4 years).
13. Assume that the RSGL anticipates that, in addition to receiving the P1,000,000 million license fee, it will
receive a bonus of P2,000,000 in year 1 of the contract and a bonus of P3,000,000 in years 2-4 of the
contract based on ReSA Logo’s sales. Also assume that the RSGL is convinced that it is probable there
will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent
periods. At the inception of the contract, what is the amount of transaction price that the RSGL would
estimate with respect to this license arrangement?
a. Zero c. P 3,000,000
b. P1,000,000 d. P12,000,000
Answer: b - Normally the RSGL would include an estimate of variable consideration in its estimate of the transaction price,
yielding an estimate of P12 million (computed as P1 million initial fee + P2 million year 1 bonus + (P3 million × 3 years for
subsequent-year bonuses).
However, the accounting standard does not allow estimates of sales-based royalties on licenses to be included in the
transaction price until that consideration is no longer variable, so those amounts would be excluded from the transaction price
estimated at the inception of the contract, and the transaction price would only include the P1 million initial fee.
Franchise Accounting
A franchise agreement involves the granting of business rights by the franchisor t o a f ranchisee that
will operate the franchise outlet in certain geographical area or location. Four types of franchising
arrangements have evolved:
• Manufacturer-retailer – car dealership
• Manufacturer-wholesaler – softdrinks company
• Service sponsor-retailer – fast-foods (Jollibee, McDonald, Chowking, etc.), Hotels like Sofitel and
Holiday-inn
• Wholesaler-retailer – automotive parts store, local hardware
PFRS 15 on Franchise Arrangements identifies two sources of revenue:

• Sale of initial franchises and related assets or services, and
• Continuing fees based on the operations of franchises.
Performance obligations relate to:

• Right to open a business.
• Use of trade name or other intellectual property of the franchisor.
• Continuing services, such as marketing help, training, and in some cases supplying inventory and
inventory management.
Franchisors commonly charge an initial franchise fee and continuing franchise fees:
1. Initial franchise fee (payment for establishing the relationship and providing some initial services).
2. Continuing franchise fees received

a. In return for continuing rights granted by the agreement

b. For providing management training, advertising and promotion, legal assistance, and other
support.
Initial Franchise Fee
Franchise agreements vary but usually involve an initial payment (called an initial franchise fee) by the
franchisee and ongoing payments of continuing franchise fees. For the initial franchise fee, the franchisor
(the party who grants business rights under the franchise) normally provides the franchisee (the party
who operates the franchised business) with the following services:
1. Assistance in site selection
a. Analyzing location
b. Negotiating lease
2. Evaluation of potential income
3. Supervision of construction activity
a. Obtaining financing
b. Designing building
c. Supervising contractor while building
4. Assistance in the acquisition of signs, fixtures, and equipment
5. Provision of bookkeeping and advisory services
a. Setting up franchisee's record
b. Advising on income, real estate, and other taxes
c. Advising on local regulations of the franchisee's business
6. Provision of employee and management training
7. Provision of quality control
Continuing Franchise Fee (Royalty Fee)
Continuing franchise fees (royalty fee) are received in return for the continuing rights granted by
the franchise agreement and for providing such services as management training, advertising and
promotion, quality control, budgeting and other accounting services, legal assistance, and other
support.
Continuing fees (royalty fee) should be reported as revenue when they are earned (over time) and
receivable from the franchisee, unless a portion of them has been designated for a particular purpose,
such as providing a specified amount for building maintenance or local advertising. In that case, the
portion deferred shall be an amount sufficient to cover the estimated cost in excess of continuing
franchise fees and provide a reasonable profit on the continuing services (point in time). The continuing
fees (royalty payments), which are typically computed as a percentage of the franchisee's sales but
can also be a fixed periodic amount, are recognized by the franchisor as revenue in the same period
that the sales are made by the franchisee.
Occasionally, the continuing franchise fee (royalty payments) is not large enough to cover the franchisor's
cost of the continuing services provided. However, the initial franchise fee i s unusually large (so, in effect
it involves a prepayment by the franchisee for the continuing services). In such cases, the franchisor
records a portion of the initial fee as a liability and amortizes the amount to franchise revenue over the
life of the franchise (over time).
I – Initial Franchise Fee/Commingled Revenue and Continuing Franchise Fee (Royalty)
Dominador’s Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Doming Corp. the
right to operate as a franchisee of Dominador’s Pizza for 5 years. Dominador’s charges Doming an initial
franchise fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when
Doming Corp. signs the agreement, and the balance is payable in five annual payments of P57,000 each
on December 31.
Consider the following for allocation of the transaction price at December 31, 20x7.
Rights to the trade name, market area, technical and proprietary know-how. P 190,000.00
Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,591.50
Machinery and equipments, etc. (costing, P95,000). . . . . . . . . . . . . . . . . . . . . . . _133,000.00
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 417,591.50
The credit rating of Doming indicates that money can be borrowed at 8%. The present value of an ordinary
annuity of five annual receipts of P57,000 each discounted at 8% is P227,591.50. The discount of P57,408.50
represents the interest revenue to be accrued by Dominador’s Pizza Inc. over the payment period.
Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Doming holds
a grand opening on February 4, 20x8. On February 4, 20x8, franchise opens. Dominador’s satisfies the
performance obligations related to the franchise rights, training, and equipment.

Doming also promises to pay ongoing royalty payments of 1% of its annual sales (payable every January
31 of the following year) and is obliged to purchase products from Dominador’s at its current standalone
selling prices at the time of purchase.
1. How many performance obligations exist in this contract for franchise?
a. 2 c. 4
b. 3 d. 5
2. When Dominador should recognize revenue for the rights (combined) to the trade name, market area
and proprietary know-how which give rise to a single performance obligation?
a. No transaction c. Point in Time
b. No revenue d. Over Time
3. How much revenue (franchise revenue, service revenue and sales revenue – machinery and
equipments) be recognized on December 31, 20x7?
a. Zero. c. P133,000.00
b. P 94,591.50 d. P190,000.00
4. How much revenue (franchise revenue, service revenue and sales revenue – machinery and equipment)
be recognized on February 4, 20x8?
a. P 94,591.50 c. P190,000.00
b. P133,000.00 d. P417,591.50
5. How much continuing franchise revenue be recognized on December 31, 20x8, assuming the sales of
P4,987,500 was generated for the first year of operations ?
a. Zero. c. P190,000.00
b. P 49,875.00 d. P417,591.50
6. How much total franchise revenue (in relation to Nos. 4 and 5) on December 31, 20x8?
a. P372,466.50 c. P417,591.50
b. P390,673.82 d. P467,466.50
7. In relation to No. 6, the net income on December 31, 20x8 amounted to?
a. Zero. c. P390,673.82
b. P 372,466.50 d. P467,466.50
Answers/Solutions:
1. b – There are three performance obligations in the contract for franchise:
PO 1 - Rights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct. Each one is
not sold separately and cannot be used with other goods or services that are readily available to the franchisee.
Combined rights give rise to a single performance obligation,
PO 2 - Training services, and
PO 3 - Equipment
Note: It should be noted that training (similar) services and equipment are distinct and can be sold separately.
Commingled Revenue (Point in Time and Over Time) - It refers to a single initial franchise fee for franchise rights, initial services,
tangible property such as supplies and equipment. The portion of the fee applicable to these assets shall be based on their
fair values and these assets are recognized upon transfer of ownership regardless when substantial performances of services
were made.
• Dominador’s cannot recognize revenue for the royalty payments because it is not reasonably assured to be entitled to those
sales-royalty amounts. That is, these payments represent variable consideration (variable consideration encompasses any
amount that is variable under a contract, including, for example, performance bonuses, penalties, discounts, rebates, price
concessions, incentives and the customer’s right to return products. Variable consideration is considered to be a component
of the transaction price. It is part of the consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services and therefore should be estimated and included in the transaction price for revenue recognition
purposes)
Therefore, Dominador’s recognizes revenue for the royalties (continuing fee) when (or as) the uncertainty is resolved.
• Dominador’s promise to stand ready to PROVIDE PRODUCTS/SERVICES to the franchisee in the future at a standalone selling
price is NOT ACCOUNTED for as a SEPARATE PERFORMANCE OBLIGATION (PO) in the contract because it DOES NOT PROVIDE
Doming with a material right (a “material right” is something the customer wouldn’t get otherwise, so the seller is obligated to
provide it or if the customer is in effect paying in advance for future goods and services such option provides the customer
with a “material right”, then the option should be accounted for as a separate performance obligation)
Thus, revenue from those sales is recorded in the future when the sales are made.
2. c – Those combined rights (trade name, market areas and proprietary know-how) give rise to a single performance obligation.
Dominador’s satisfies performance obligation at point in time when Doming obtains CONTROL of the RIGHTS. That is, once Doming
begins operating the store. Dominador has no further obligation with respect to these rights.
It should be noted that training (similar) services and equipment are distinct and can be sold separately. Dominador’s satisfies
those performance obligations (services and equipment) when it transfer the services and equipment to Doming.
3. a - As of December 31, 20x7, only signing of agreement and receipts of upfront payment and note were made. Consider the
following for allocation of the transaction price at December 31, 20x7.
Rights to the trade name, market area, technical and proprietary know-how. P 190,000.00
Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,591.50
Machinery and equipments, etc. (costing, P95,000). . . . . . . . . . . . . . . . . . . . . . . _133,000.00
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 417,591.50

The entries on December 31, 20x7: Dominador’s signs the agreement and receives upfront payment and note.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000.00
Unearned interest income (or Discount on notes receivable) . . . 57,408.50
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000,00
Unearned service revenue – training, etc. . . . . . . . . . . . . . . . . . . . 94,591.50
Unearned sales revenue – machinery and equipments, etc. . . . 133,000.00
Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Doming holds a grand opening on
February 4, 20x8.
4. d - February 4, 20x8: Franchise opens. Dominador’s satisfies the performance obligations (point in time) related to the franchise
rights, training and equipment. That is, Dominador’s has no further obligations related to these elements of the franchise.
Therefore, franchise revenue amounted to P417,591.50 (P190,000 + P94,591.50 + P133,000).
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000.00
Unearned service revenue – training, etc. . . . . . . . . . . . . . . . . . . . . . 94,591.50
Service revenue – training, etc. 94,591.50
Unearned sales revenue – machinery and equipment, etc.. . . . . . . 133,000.00
Sales revenue – machinery and equipment, etc. . . . . . . . . . . . . . 133,000.00
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000.00
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000.00
As indicated, when Doming begins operations, Dominador’s Pizza satisfies the performance obligations (point in time)
related to the franchise rights, training and equipment under the franchise agreement. That is, Dominador’s has no further
obligations related to these elements of the franchise.
5. b - Dominador’s recognizes revenue for the royalties (continuing fee) when (or as) the uncertainty is resolved (over time ).
On December 31, 20x8, the continuing (royalty) franchise fees:
Accounts receivable (P4,987,500) x 1%). . . . . . . . . . . . . . . . . . . . . . . . 49,875.00
Franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,875.00
December 31, 20x8: To record payment received and interest income on note:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000.00
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000,00
Unearned interest income (or Discount on notes receivable). . . . . . . 18,207.32
Interest income (P227,591.50 x 8%). . . . . . . . . . . . . . . . . . . . . . . . . . . 18,207.32
Date Collection Interest Principal Unpaid Balance (PV)

12/31/20x7 P 417,591.50
12/31/20x7 190,000.00 -0- 190,000.00 227,591.50
12/31/20x8 57,000.00 *18,207.32 38,792.68 188,798.82
12/31/20x9 57,000.00 **15,103.91 41,896.09 146,902.73
12/31/20y0 57,000.00
*8% x 227,591.50 (PV) = P18,207.32
**8% x 188,798.82 (PV) = PP15,103.91
6. d - Therefore, the total amount of franchise revenue recognized on December 31, 20x8 amounted to P467,466.50 computed as
follows:
Franchise Revenue:
(Point in time, February 4, 20x8):
Initial Franchise Fee............................................................................................. P 417,591.50
(Over time)
Continuing franchise fee , P4,987,500 x 1%)..................................................... __49,875.00
Total Franchise revenue.................................................................................................. P 467,466.50
Less: Cost of goods sold................................................................................................... __95,000.00
Gross profit......................................................................................................................... P 372,466.50
Less: Operating expenses................................................................................................ _______0.00
P 372,466.50
Add: Interest income (refer to No. 5); 8% x 227,591.50 (PV)………………………….. __18,207.32
Net income......................................................................................................................... P 390,673.82
7. c - Net income amounted to P390,673.82 – refer to No. 6.

Recognition of Franchise Rights Revenue Over Time
Depending on the economic substance of the rights, the franchisor may be providing access to the right rather than
transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a
point in time.
II – Initial Franchise Fee/Commingled Revenue
Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as a franchisee of
Frozen Delight. Of this amount P25,000 is collected immediately. The remainder is collected in four equal
annual instalments of P12,500 each. These instalments have a present value of P41,402. As part of the total
franchise fee, Frozen Delight also provides training (with a fair value of P2,000) to help franchisees get the
store ready to open. The franchise agreement is signed of April 1, 20x5, training is completed, and the store
opens on July 1, 20x5.
1. The amount of revenue from training and franchise on April 1, 20x5 to:
a. Zero. c. P66,402
b. P64,402 d. P75,000

2. The amount of revenue from training and franchise on July 1, 20x5 to:
a. Zero. c. P66,402
b. P64,402 d. P75,000
III – Initial Franchise Fee
Items 1 to 7 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 payment of P28,000 is due. Thereafter, three annual payments of P14,000 are required. The credit
rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise
agreement signed on May 1, 20x5, and the franchise commences operation on July 1, 20x5.
1. The amount of franchise revenue on May 1, 20x5 assuming no future services are required by the
franchisor once the franchise starts operations:
a. Zero. c. P62,816
b. P28,000 d. P70,000
2. In relation to No. 1, the amount of franchise revenue on July 1, 20x5:
a. Zero. c. P62,816
b. P28,000 d. P70,000
3. The amount of franchise revenue on May 1, 20x5 assuming that the franchisor has substantial services
to perform, once the franchise begins operations, to maintain the value of the franchise.
a. Zero. c. P62,816
b. P28,000 d. P70,000
4. In relation to No. 3, the amount of franchise revenue on December 31, 20x5:
a. Zero. c. P62,816
b. P13,959 d. P70,000
5. The amount of franchise revenue on May 1, 20x5 assuming that the total franchise fee includes training
services (with a value of P2,400) for the period leading up to the franchise opening and for two (2)
months following opening.
a. Zero. c. P62,816
b. P60,416 d. P70,000
6. In relation to No. 5, the amount of franchise revenue excluding service revenue – training on July 1,
20x5:
a. Zero. c. P61,616
b. P60,416 d. P63,616
7. In relation to Nos. 5 and 6, the amount of service revenue on September 1, 20x5:
a. Zero. c. P 2,400
b. P1,200 d. P70,000
Solution:
1. a
May 1, 20x5 (Date of Signing)
Cash ………………………………………………………………………………………………….. 28,000
Notes Receivable (P70,000 – P28,000)…………………………………………………………… 42,000
Discount on Notes Receivable /Unearned Interest Income
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Unearned Franchise Revenue (P28,000 + P42,000 – P7,184)…………..………………. 62,816
2. c
July 1, 20x5 (Date of Opening – Point in Time)
Unearned Franchise Revenue…………………………………………………………………… 62,816
Franchise Revenue……………………………………………………………………………. 62,816
3. a
Cash ………………………………………………………………………………………………….. 28,000
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Contract Liability (franchise) (P28,000 + P42,000 – P7,184)…………..………………. 62,816
Note: A contract liability is generally referred to as Unearned Sales Revenue, Unearned
Service Revenue, or any appropriate account title.
4. b - December 31, 20x5 (Date of Signing – Over Time): (P62,816 ÷ 3) x 8/12 = P13,959
Franchise Revenue……………………………………………………………………………. 13,959
5. a
Cash ………………………………………………………………………………………………….. 28,000
[P42,000 – (2.48685* x P14,000)]……………………………………………………… 7,184
Unearned Service Revenue (Training)…………………………………………….. 2,400
Unearned Franchise Revenue (P28,000 + P42,000 – P7,184 – P2,400)..……………... 60,416

6. b
July 1, 20x5 (Date of Opening – Point in Time and Over Time)
Franchise Revenue (Point in Time)......…………………………………………………….. 60,416
August 1, 20x5 (Over Time – 7/1 Date of Opening- 8/1 and 8/1-9/1)
Unearned Service Revenue (Training) – P2,400/2 …………………………………………… 1,200
Service Revenue (Training – Over Time)………………………………………………….. 1,200
7. b
September 1, 20x5
Unearned Service Revenue (Training)………………………………………………………….. 1,200*
Service Revenue…………………………………………………………………………… …… 1,200
(Calculations rounded). *Present value of ordinary annuity 3 years at 10%.
V – Initial Franchise Fee

1. TopChop sells hairstyling franchises. TopChop receives P50,000 from a new franchisee for providing initial
training, equipment and furnishings that have a stand-alone selling price of P50,000. TopChop also
receives P30,000 per year for use of the TopChop name and for ongoing consulting services (starting
on the date the franchise is purchased). Carlos became a TopChop franchisee on July 1, 20x6, and on
August 1, 20x6, had completed training and was open for business. How much revenue in 20x6 will
TopChop recognize for its arrangement with Carlos?
a. Zero c. P65,000
b. P10,000 d. P70,000
2. Pita Pal sells fast-food franchises. Pita Pal receives P75,000 from a new franchisee for providing initial
training, equipment, and furnishings that together have a stand-alone selling price of P75,000. Pita Pal
also receives P36,000 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, 20x6 Rachel had completed training and was open for business. How much revenue in 20x6
will Pita Pal recognize for its arrangement with Rachel?
a. Zero c. P 99,000
b. P75,000 d. P105,000
VI – Initial Franchise Fee, Continuing Franchise Fee and Bargain Purchase

1. On January 1, 20x5 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the
company to do business under Dairy Treats's name. Dairy Treats had performed substantially all required
services by January 1, 20x5, and the franchisee paid the initial franchise fee of P840,000 in full on that
date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of
P72,000 annually, of which 20% must be spent on advertising by Dairy Treats. What entry should Dairy
Treats make on January 1, 20x5 to record receipt of the initial franchise fee and the continuing franchise
fee for 20x5?
a. Cash ............................................................................................. 912,000
Franchise Fee Revenue ................................................. 840,000
Revenue from Franchise Fees ....................................... 72,000
b. Cash ............................................................................................. 912,000
Unearned Franchise Fees .............................................. 912,000
c. Cash ............................................................................................. 912,000
d. Prepaid Advertising ..................................................................... 14,400
Cash ............................................................................................. 912,000
2. 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 annual payments. The present value of the future payments, discounted
at 10%, is P1,091,744. The franchisee has the option to purchase P240,000 of equipment for P192,000.
Wynne has substantially provided all initial services required and collectibility of the payments is
reasonably assured. The amount of revenue from franchise fees:
a. P 400,000. c. P1,491,744.
b. P1,443,744. d. P1,840,000.
3. Pasta Inn charges an initial fee of P1,600,000 for a franchise, with P320,000 paid when the agreement is
signed and the balance in four annual payments. The present value of the annual payments,
discounted at 10%, is P1,014,000. The franchisee has the right to purchase P60,000 of kitchen equipment
and supplies for P50,000. An additional part of the initial fee is for advertising to be provided by Pasta

Inn during the next five years. The value of the advertising is P1,000 a month. Collectibility of the
payments is reasonably assured and Pasta Inn has performed all the initial services required by the
contract. How much revenue from franchise fee be recognized when the agreement is signed?
a. Zero. c. P1,590,000
b. P1,264,000 d. P1,600,000
Answer: b
Total Franchise Fee……………………………………………………. P1,600,000
Less: Unearned Interest Income
Amount due……………………………………………………. P1,280,000
Less: Present value of payments…………………………… 1,014,000 ( 266,000)
Bargain Purchase Option (P60,000-P50,000) – note……… ( 10,000)
Advertising (P1,000 x 60 months)…………………………….. ( 60,000)
Revenue from Franchise Fee………………………………………… P1,264,000
Incidentally, the entry would be as follows:
Cash ………………………………………………………….................... 320,000
Notes Receivable.............................................................................. 1,280,000
Unearned Interest Income/Discount on Notes Receivable 266,000
Revenue from Franchise Fees.................................................. 1,264,000
Unearned Franchise Fees (P10,000 + P60,000)....................... 70,000
Note: Bargain Purchases (Point in Time)

In addition to providing services as part of the continuing franchise fee, a franchisor often sells
supplies to the franchisee. These sales occur because the franchisor may be able to obtain quantity
discounts from manufacturers or wholesalers, or to ensure the quality of the supplies. The franchisor
records these sales and related expenses in the normal manner.
In addition to paying continuing franchise fees, franchisees frequently purchase some or all of their
equipment and supplies from the franchisor. The franchisor would account for these sales as it would
for any other product sales.
Sometimes, however, the franchise agreement grants the franchisee the right to make bargain
purchases of equipment or supplies after the initial franchise fee is paid.
The amount to be deferred shall be either of the following:
• the reasonable profit If indicated bargain price or option price is lower than the normal selling
price of the same product,
• or if it does not provide the franchisor a reasonable profit, then a portion or the full amount of the
initial franchise fee should be deferred and recognize at point in time or at the time the
equipment and supplies will be delivered.
The deferred portion would be accounted for as an adjustment of the selling price when the
franchisee subsequently purchases the equipment or supplies (point in time).
VII- Theories
1. Types of franchising arrangements include all of the following except
a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.
2. All revenue for franchise companies is derived from
a. assistance for site selection and negotiating lease.
b. bookkeeping and advisory services.
c. sale of initial franchise and continuing fees.
d. advertising and promotion.
3. 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 franchisor.
d. when performance obligations are satisfied.
4. Continuing franchise fees (such as royalty) should be recorded by the franchisor
a. as revenue when uncertainty related to the variable consideration is resolved.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.

Non-Refundable Upfront Fees

Upfront payments generally relate to the initiation, activation, or setup of a good or service to be provided
or performed in the future.
• Examples include:
- Membership fee in a health club where once the initiation fee is paid, no additional fee is
necessary upon renewal.
- Fees paid for membership in a buying club, and
- Setup fees, activation fees for phone, internet, or cable.
In most cases, these upfront payments are non-refundable.
• Payments from customers before:
- Delivery of a product.
- Performance of a service.
• In most situations, these payments are for future delivery of products and services such as fares for
flight or cruises, season tickets for entertainment events, insurance premiums, advertising, rent, and
others and should therefore not be recorded as revenue at the time of payment. Revenue should
not be recognized until the performance obligation is satisfied.
• A prepayment is not a performance obligation because they are not a promise to transfer a product
or service to a customer. Some contracts require non-refundable up-front fees for particular
activities (for instance, Fitness First charges up-front registration fees for gym memberships).
• Upfront fee is an advance payment by the customer for future products or services and should be
included in the transaction price, allocated to the various performance obligations in the contract,
initially recorded as deferred revenue, and recognized as revenue when (or as) each performance
obligation is satisfied.
The upfront fee payments should be allocated over the periods benefited since it represents as an
advance payment for future goods or services, such fees would be recognized as revenue only
when those future goods or services are provided.
• In other cases, the upfront fee is viewed similar to a renewal option for future products and services
at a reduced price.
• In addition, the cash payment may be for goods or services to be redeemed in the future at the
customer’s request (e.g., gift cards – AFAR-06)
VIII
1. Nonrefundable upfront fees
a. should be recognized immediately upon receipt of payment.
b. such as activation fees for cable should be recognized as revenue immediately.
c. such as a one-time initiation fee in a health club should be recognized immediately.
d. should not be recorded as revenue at the time of payment if they are for future delivery of products
and services.
Non-refundable Upfront Initiation Fees: Right to Access (OT)

2. Chris Health Club enters into a contract on January 1, 20x8 with customers for one year access to gym,
swimming pool and tennis courts for P120,000 per year. Chris also charges a P18,000 nonrefundable
initiation fee to compensate for the administrative tasks to register the customer. How many
performance obligations exist in the contract?
a. 0 c. 2
b. 1 d. 3
Answer: (b) - Registering the customer is not considered a performance obligation because it does not transfer a
good or service to a customer. Instead, Chris performance obligation is to provide the customer the right to access
its facilities. Because this performance obligation is satisfied over time, the upfront fee is recognized on a straight-
line basis over the 1-year contract period (P18,000/12 = P1,500 per month). Similarly, the P120,000 annual fee is
recognized as revenue of P10,000 each month of the contract period. Total revenue per month for first year
amounted to P11,500.
3. The total transaction price of this arrangement – non-refundable upfront fee should be:
a. None c. P600,000
b. P18,000 d. P618,000
Answer: (d): Non-refundable initiation fee/upfront……………………………………………P 18,000
Membership fee: (P120,000 per year x 5 years)……………………………….. 600,000
Total……………………………………………………………………………………..P 618,000

4. On January 2, 20x8 (time of sale/point in time), the recognize revenue amounted to:
a. None c. P 18,000
b. P11,500 d. P138,000
5. On December 31, 20x8, the recognize revenue amounted to:

a. P11,500 c. P120,000
b. P18,000 d. P138,000
Answer: (d): Refer to No. 2 for discussions
Non-refundable initiation fee/upfront……………………………………………P 18,000
Membership fee: (P120,000 per year x 1 year)..………………………………. 120,000
Total……………………………………………………………………………………..P 138,000
6. Assume, however, that Chris allows customers to renew their membership without having to pay another
initiation fee upon renewal. Further, Chris determines that its customers, on average, remain members
for 5 years, the recognize revenue for 20x8 amounted to:
a. P 18,000 c. P123,600
b. P100,000 d. P618,000
Answer: (c) - The P618,000 allocates it evenly over the 5-year expected contract length. Therefore, Aljon would recognize revenue
of P123,600 (P618,000/ 5 years). In this case, the P18,000 initiation fee would be recognized as revenue when received and
allocated to revenue over the expected contract period (over time).
7. Assume that a customer enrolls in AAA’s Premier Membership, which provides 12 months of roadside
assistance for P120. On August 1, 20x6, a customer purchases a contract that runs from that date
through July 31, 20x7. Given that roadside assistance requests occur equally throughout the contract
period, AAA uses “proportion of time” as its measure of progress toward completion. The amount of
sales revenue on August 1?
a. Zero c. P 120
b. P 10 d. P1,440
Answer: (a) – August 1
Cash 120
Deferred revenue 120
8. Using the same information in No. 7, the sales revenue on December 31 amounted to:
a. Zero c. P 60
b. P 50 d. P120
Answer: (b) - December 31: 5/12 of a year of service has been provided, so AAA should recognize 5/12 × P120 = P50 of
revenue.
Deferred revenue 50
Sales Revenue 50
Prepayments, Coupons, Customer Options and Material Right

Burn & Fit (B&F) is a health club that offers members various gym services.
Assume B&F offers a deal whereby enrolling in a new membership for P700 provides a year of unlimited
access to facilities and also entitles the member to receive a voucher redeemable for 25% off yoga classes
for one year. The yoga classes are offered to gym members as well as to the general public.
A new membership normally sells for P720, and a one-year enrollment in yoga classes sells for an additional
P500.
B&F estimates that approximately 40% of the vouchers will be redeemed. B&F offers a 10% discount on all
one-year enrollments in classes as part of its normal promotion strategy.
9. How many performance obligations are included in the new member deal?
a. 0 c. 2
b. 1 d. 3
Answer: (c) - Number of performance obligations in the contract: 2. The unlimited access to facilities and classes for one year is
one performance obligation. Because the discount voucher provides a material right to the customer that the customer would not
receive otherwise or then (a 25% discount rather than a 10% discount), it is a second performance obligation. The discount voucher
is capable of being distinct because it could be sold or provided separately, and it is separately identifiable, as it is not highly
interrelated with the other performance obligation of providing access to Burn & Fit’s facilities, and the seller’s role is not to integrate
and customize them to create one product or service. So, the discount coupon qualifies as a performance obligation.
10. How much of the contract price would be allocated to each performance obligation (stand-alone
selling price of yoga discount voucher and gym membership, respectively)?
a. P 0; P750 c. P750; P 0
b. P30; P720 d. P 28; P672
Answer: (d) - To allocate the contract price to the performance obligations, we should first consider that Burn & Fit would offer a
10% discount on the yoga course to all customers as part of its normal promotion strategy. So, a 25% discount provides a customer
with an incremental value of 15% (25% – 10%). Thus, the estimated stand-alone selling price of the course voucher provided by
Burn & Fit is P30 (P500 initial price of the course  15% incremental discount  40% likelihood of exercising the option).

B&F’s estimated stand-alone selling price of the discount option is:

Value of the yoga discount voucher:
(25% discount – 10% normal discount)  P500 = P 75
Estimated redemption  40%
Stand-alone selling price of yoga discount voucher: P 30
Stand-alone selling price of gym membership: 720
Total of stand-alone prices P750
B&F must identify each performance obligation’s share of the sum of the stand-alone selling prices of all deliverables:
P30
Yoga discount voucher: = 4%
P30 + P720
P720
Gym membership: = 96%
P30 + P720
100%
B&F then allocates the total selling price based on stand-alone selling prices, as follows:
P700
Transaction Price
96% 4%
P672 P28
Gym membership Yoga discount voucher
11. The journal entry to recognize sale of a new membership. Clearly identify revenue or deferred revenue
associated with each performance obligation:
a. Cash 700
Deferred revenue – membership fees 672
Deferred revenue – yoga option 28
b. Cash 700
Deferred revenue – membership fees 700
c. Cash 700
Deferred revenue – yoga option 700
d. Cash 700
Revenue – membership fees 672
Revenue – yoga option 28
Answer: (a) - such deferred revenue will be recognized as revenue; the moment there is performance of obligation.
Consignment Accounting
A consignment constitutes the transfer of possession of merchandise without the transfer of title from the
owner, called the consignor, to another person, called the consignee. The consignee acts as an agent in
behalf of the consignor for the purpose of selling the goods for a commission.
The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has taken
place, it is not the intent of either the consignor or the consignee that sale and purchase transactions take
place. Title of the goods remains with the consignor, and recognition of the sale is deferred until goods are
transferred to a third party by the consignee.
The merchandise is carried throughout the consignment as the inventory of the consignor, separately
classified as Merchandise Inventory on Consignment. It is not recorded as an asset on the consignee’s
books. Upon sale of the merchandise, the consignee has liability for the net amount due the consignor.
When an entity delivers its product to a dealer for distributor for sale to end customers, the entity needs to
determine whether the contract is a sale or a consignment arrangement.
SALE The dealer or distributor Recognize revenue when the product is shipped
has obtained control of or delivered to the dealer or distributor
the product (depending on the terms of the contract.)
CONSIGNMENT The dealer or distributor
Recognize revenue when the dealer or distributor
has not obtained
sells the product to a customer, or when the
control of the product
dealer or distributor obtains control of the product
(i.e. after a specified period of time expires).
The following are indicators of a consignment arrangement:

• The entity controls the product until a specified event occurs, such as the sale of the product to a
customer or until a specified period expires.
• The entity can require the return of the product or transfer the product to another party.
• The dealer does not have an unconditional obligation to pay the entity for the product (although
it might be required to pay a deposit).

A common principal-agent relationship involves consignments. In these cases, manufacturers (or

wholesalers) deliver goods but retain title to the goods until they are sold. This specialized method of
marketing certain types of products makes use of an agreement known as a consignment.
Under this arrangement, the consignor (manufacturer or wholesaler) ships merchandise to the consignee
(dealer), who is to act as an agent for the consignor in selling the merchandise. Both consignor and
consignee are interested in selling – the former to make a profit or develop a market, the latter to make a
commission on the sale.
The consignee accepts the merchandise and agrees to exercise due diligence in caring for and selling it.
The consignee remits to the consignor cash received from customers, after deducting a sales commission
and any chargeable expenses.
In consignment sales, the consignor uses a modified version of the point-of-sale basis of revenue
recognition. That is, the consignor recognizes revenue only after receiving notification of the sale and cash
remittance from the consignee.
The consignor carries the merchandise as inventory throughout the consignment, separately classified as
inventory (consignment). The consignee does not record the merchandise as an asset on its books. Upon
sale of the merchandise, the consignee has a liability for the net amount due to the consignor.
The consignor periodically receives from the consignee a report called account sales that shows the
merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash
remitted. Revenue is then recognized by the consignor.
Rights and Responsibilities of the Consignee
Before goods are transferred on consignment, a written agreement should specify clearly the intent of the
parties. The agreement should address such issues as the amount and type of the consignee’s expenses to
be reimbursed by the consignor, how the consignee’s commissions are to be computed, when
commissions are to be paid, the credit terms and conditions, if any, to be considered by the consignee in
granting credit, and the responsibility for collection of receivables. The agreement should be complete
and attempts to avoid potential points of conflict. For items not provided for in the agreement that result
in litigation, the laws of bailment and agency apply.
Accounting by the Consignor
The journal entries t o be made on the books of the consignor vary, depending on:
• Whether consignment transactions are recorded in separate ledger accounts for the
purpose of determining profits on consignment sales, or are simply combined with the
regular account balances, and
• Whether a perpetual or periodic in v e n to ry system is used.
Because title to the merchandise is held by .the consignor but physical possession is held by
the consignee, special accounting records must be maintained by the consignor for control
purposes.
No revenue is recognized until a sale is made by the consignee. Upon shipment of the merchandise by
the consignor, an inventory account is established on the consignor's books to identify the consigned
merchandise.
Any consignment expenses paid by the consignor are added to the inventory balance as added costs.
The consignee does not make an entry for receipt of the Inventory in the general ledger; however,
memorandum control records usually are kept.
Any reimbursable expense paid by the consignee is charged to a receivable account by consignee
and added to the inventory balance by the consignor.
When -a sale is made, consignor recognizes the sale as revenue according to one of the revenue
recognition methods, and the consignee recognizes the commission as revenue on the transaction.
Consignor’s:
1. Consignment transactions recorded separately – this method determines consignment profit
separate from regular sales. An inventory account called as Inventory on Consignment* is used to
record transactions in relation to consignment.
Inventory on Consignment* account is debited for:
• Cost of goods shipped on consignment
• Expenses related to consignment incurred by the consignor
• Reimbursable expenses related to consignment paid by the consignee.

Inventory on Consignment* account is credited for:

• Cost of goods returned by the consignee
• Cost of consignment sales and expenses relating to consignment.
*account term “consignment-out” maybe alternatively used when consignment profit can be calculated separately.
2. Consignment transactions not recorded separately – consignment transactions are treated like a
regular type of sales. Determination of consignment profit is not required because it is already part
of the profit of the entire entity.
Accounting by the Consignee
Accounting procedures established by the consignee must recognize that goods received on
consignment are not owned. However, as noted earlier, the consignee must:
• Maintain records and controls that permit the identification of:
a. Goods held on consignment and
b. Related receivables and reimbursable expenses, and
• Prepare periodic reports. The consignee normally creates a special account: Consignor
Receivable or Consignor Payable* ,
Consignee’s
1. Consignment transactions recorded separately – under this method, two accounts are needed to
be maintained in relation to consignment transactions:
Consignor receivable* account is:
• debited for expenses paid by the consignee but chargeable to the consignor
• credited when remittance is made to the consignor
Consignor payable* account is:
• credited for the sales by the consignee
• debited when remittance is made by the consignor
*account term “consignment-in” maybe alternatively used when consignment profit can be calculated separately.
2. Consignment transactions not recorded separately – consignment transactions are treated like a
regular type of sales. Determination of consignment profit is not required because it is already part
of the profit of the entire entity.
Transactions recorded separately are more convenient on the consignor and consignee’s books to
determine the results of operations.
The following costs and expenses for the consignment transactions should carefully be noted:
• Items to be allocated between sold and unsold items:
a. Freight cost paid by the consignor upon shipment
b. Freight and cartages paid by the consignee upon receipt of the shipment
c. Insurance freight of consigned goods
d. Packaging costs of consigned goods
e. Costs and fees such as repairs, installation of devices paid by the consignor and/or consignee
related to the consigned goods.
• Items chargeable to the sold units:
a. Commissions
b. Delivery and installation
c. Advertising
d. Reconditioning on delivered units to customers
e. Insurance in transit to customers
f. Expenses related to returned units delivered
Consignment Sales
The accounting procedures regarding consignment sales under PFRS 15 still remains and for purposes of
overview regarding the application of PFRS 15 on consignment:
• Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold.
• Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to
act as an agent for the consignor in selling the merchandise. Consignee makes a commission on
the sale.
• Consignor makes a profit on the sale and carries merchandise as inventory.
The CC Manufacturing Company delivered ten DVD players to CLTV Company on consignment. These
DVD player cost P3,000 each and are to be sold at P5,000 each. The CC Manufacturing Co. paid shipment
cost of P2,500.

CLTV Co. submitted an account sales stating that it had returned one unit and was remitting P21,900. This
amount represents the total amount due to CC Manufacturing Co. after deducting the following from the
selling price of the DVD player sold:
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% of selling price
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000
Delivery and installation . . . . . . . . . . . . . . . . . . . P 600
Cartage on consigned goods . . . . . . . . . . . . . . P 500
1. The number of units sold by TV Co. is:
a. 4 c. 6
b. 5 d. None of the above
2. The profit (loss) on consignment realized by CC Manufacturing Company is:
a. P2,300 c. (P2,550)
b. P2,480 d. None of the above
3. The cost of inventory in the hands of CLTV Company is:
a. P10,080 c. P10,200
Solution:
1.
Sales (unknown)
Less: Charges by consignee:
Commission (unknown)
Advertising
Delivery and installation
Cartage on consigned goods
Remittance
x–( + + + )=P
x– x=P +P
%x = P
x = P________
Number of units sold = _P_________ = __
P per set
2.
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(10) (6) (3)
Consignor’s charges:
Cost, P300
Freight-in/Cartage-In
Consignee’s charges:
Commission (20% x P________)
Advertising
Delivery and installation
Freight/Cartage
Total
Sales price
Profit on Consignment
3. – refer to No. 2 for computation.

TS Trading consigned 100 beds costing P600 each to PP Company. The advertised selling price is P1,000
each bed. The consignment agreement provides that the consignee is to be allowed a commission of 15%
of the selling price. Furthermore, PP Company has to draw a sight draft for 60% of the cost of the beds; the
advance is to be recovered periodically by monthly deductions (in proportion to units sold) from the
remittances which accompany the account sales. All expenses of the consignee are to be deducted
monthly as incurred.
At the end of the first month, the consignee rendered an account sales showing among others the following
charges: Commission, P2,250; Advertising, P1,500; and Delivery Expense, P750.
4. The number of units sold by PP Co. is:
a. 10 c. 20
b. 15 d. 25

5. The amount remitted to TS Co. for the month is

a. P1,500 c. P5,100
b. P4,500 d. P5,500
6. The consignment profit (loss) of TS Co. is:
a. (P1,500.00) c. P3,412.50
b. P 2,137.50 d. None of the above
Solution:
4. b
Sales (P2,250 / 15%) P15,000
Divided by: Selling price per unit P 1,000
Number of units sold 15 units
5. c
Sales P15,000
Less Charges by consignee
Commission P 2,250
Advertising 1,500
Delivery expense ___750 __4,500
Due to Consignor P10,500
Less: Advances
Value of note – sight draft: (100 beds x P600 per bed) x 60% P36,000
Multiplied by: Proportional number of beds sold 15/100 __5,400
Amount remitted P 5,100
6. d – P1,500
Sales P15,000
Less Charges:
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds) 9,000
Consignee’s charges:
Commission P2,250
Advertising 1,500
Delivery expense ___750 __4,500
Consignment net income P1,500

On June 1, DD Company shipped twenty five DVD to BB View Store on consignment. The DVD is to be sold
at an advertised price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid
P75 to ship the merchandise. Commission is to be 25% of sales price. During the month, two DVD were
returned. On June 30, BB View Store remitted the amount due to consignor after deducting commission of
P400.
7. The amount remitted by BB View Store is:
a. P1,100 c. P1,200
b. P1,600 d. P2,000
8. The consignment profit is:
a. P370 c. P720
b. P415 d. P800
9. The cost of inventory on consignment amounted to:
a. P1,400 c. P1,545
b. P1,550 d. P1,500
Items 10 and 11 are based on the following information:
On October 1, 20x4, the NN Company consigned one hundred wall clocks to P&G Retailers, Inc. Each wall
clock had a cost of P150. Freight on the shipment was paid by NN Company for P200. On December 1,
20x4, P&G submitted an account sales stating that it had sold sixty pieces and it was remitting the P12,840
balance due. The remittance was net of the following deductions from the sales price of the wall clocks
sold:
Commission (20% of sales price)………………………… ?
Advertising and repairs.........................................……… P500
Delivery and installation charges………………….……. P100
10. What was the total sales price of the wall clocks sold by P&G Retailers, Inc.?
a. P13,440 c. P16,800
b. P15,000 d. P17,000
11. What was the cost of inventory on consignment?

a. P 6,000 c. P6,280
b. P6,080 d. P6,320

Solution:
10. c – P16,800
Sales (unknown) x
Less Charges:
Advertising P500
Delivery and installation charges 100
Commission (unknown) 20%x _______
Remittance P 12,840
x – (P500 + P100 + 20%x) = P 12,840
x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800
11. b- P6,080
Cost (P150 per unit x 40 units) P6,000
Freight on shipment (P200 x 40/100) 80
Cost of inventory on consignment P6,080

On May 1, 20x4, TV Inc. consigned 80 VCD players to Ed's TV. The VCD player cost P270. Freight on the shipment paid
by Ed’s TV was P600. On July 10, TV Inc. received an account sales and P12,900 from Ed's TV. Thirty VCD players had
been sold and the following expenses were deducted:
Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 600
Commission (20% of sales price) . . . . . . . . . . . . ?
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 390
Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 210
12. The total sales price of the VCDs sold by Ed's TV was:
a. P15,375 c. P16,388
b. P16,125 d. P17,625
13. The inventory of VCDs will be reported on whose balance sheet and at what amount?
Balance Sheet Amount of Balance Sheet Amount of
of Inventory of Inventory
a. TV Inc. P 13,875 c. Ed TV P 13,875
b. TV Inc. P 13,500 d. Ed TV P 13,500
Solution:
14. d - P17,625
Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.
15. a-(P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.

Information relating to regular sales and consignment sales of EE Products for the year ended June 30, 20x4
follows:
Regular Sales Consignment Sales Total
Sales . . . . . . . . . . . . . . . . . . . . . . . . . P120,000 P30,000 P150,000
Cost of Sales . . . . . . . . . . . . . . . . . . 84,000 26,000 110,000
Operating expenses . . . . . . . . . . . ? 1,760 16,910
You ascertain that merchandise costing P6,500 are in the possession of consignees and are included in the
cost of consigned merchandise sold. Operating expenses of P15,150 (more than half of which are fixed)
are to be allocated to regular sales and to consignment sales on the basis of volume. The P1,760 operating
expenses relating to consignment sales include a commission of 5% and P260 Costs incurred by consignees
relating to the entire shipment of merchandise worth P26,000.
14. The net income on regular sales is:
a. P30,280 c. P17,380
15. The net income on consignment sales is:

a. P8,740 c. P2,240

Solution:
14. b
Regular Sales Consignment Sales Total
Sales P120,000 P30,000 P150,000
Cost of sales 84,000 19,500* 103,500
Gross profit P 36,000 P10,500 P 46,500
Operating expenses:
Commission (P30,000 x 5%) P 1,500 P 1,500
Freight-in (P260 x P19,500*/P26,000) 1,950 1,950
Others
Regular (P15,150 x P19,500/P26,000) 12,120
Consignment
(P15,150 x P30,000/P150,000) _______ 3,030 3,030
Total P 12,120 P 4,725 _P16,845_
Net profit P 23,880 P 5,775 P29,655
*P26,000 – P6,500 = P19,500
15. d – P5,775 (refer to No. 14 for computation)
16. Seahawks, Inc. had the following consignment transactions during December:
Inventory shipped on consignment to Ashe Company . . . P18,000
Freight paid by Seahawks . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Inventory received on consignment from Fenn Company 12,000
Freight paid by Fenn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
No sales of consigned goods were made through December 31. Seahawks' December 31 balance
sheet should include consigned inventory at
a. P18,900 c. P12,500
b. P18,000 d. P12,000
Answer: a – (P18,000 + P900) = P18,900
17. Kerianne paints landscapes, and in late 20x6 placed four paintings with a retail price of P250 each in
the Holmstrom Gallery. Kerianne’s arrangement with Holmstrom is that Holmstrom will earn a 20%
commission on paintings sold to gallery patrons. As of December 31, 20x6, one painting had been sold
by Holmstrom to gallery patrons. How much revenue with respect to these four paintings should
Kerianne recognize in 20x6?
a. P 0 c. P250
b. P50 d. None of the above
Answer: c - P250, equal to revenue for the sale of one painting. Kerianne has a consignment
arrangement with Holmstrom, so should not recognize transfer of paintings to Holmstrom as sales.
Kerianne would recognize Holmstrom’s commission of P250 × 20% = P50 as an expense.
GOD BLESS YOU ALWAYS!!!

*The great thing in the world is not so much where you are but in what direction you are going*
*There are only two things in the world to worry over; the things you can control,
and the things you can’t control. Fix the first, forget the second.*
It is the habit of a mind which attaches to abstractions with passion which gives vast results.
There are storms to be considered, problems to be reckoned with, crisis to be encountered, high seas to contend with, unfateful
events that should be hurdled and they are phenomenon to be shunned with great faith and courage.
We definitely reached new heights in conquering certain fears that hinders us from becoming battle-tested individuals, enough to
survive the wheels of life.
Parting is a very sweet sorrow…
We tend to forget that life is a gift to be enjoyed to the fullest and not a burden
A DREAM UNREALIZED IS A DREAM IMPRISONED BY THAT ENEMY OF ALL ENEMIES THE FEAR OF FAILURE. SET THAT
DREAM FREE BY DETERMINING THAT YOU WILL MAKE IT HAPPEN.
**Every great success was at the beginning impossible.**

**Opportunities are usually disguised as handwork, so most people don’t recognize them.**
**The only thing that stands between a man and what he wants from life is often merely the will to try it and the faith to believe
that it is possible.**
**A goal is nothing more than a dream with a time limit.**
**GOD’s LOVE is like a river that keeps on flowing…**

AFAR-05 (Licenses, Royalties, Franchises &amp; Consignment)

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AFAR-05 (Licenses, Royalties, Franchises &amp; Consignment)

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Weeks 5 - 6

ADVANCED FINANCIAL ACCOUNTING & REPORTING A. Dayag  G. Caiga  M. Ngina

AFAR-05: LICENSES, ROYALTIES, FRANCHISES, NON-

Two types of License:

• A license to use an entity’s IP is accounted for as a performance obligation satisfied at a point in

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2. Jennifer Enterprises licenses customer-relationship software to Jenny Company. In addition to providing

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7. The license to use the name, ReSA Associates is:

Royalties - Variable Consideration included in License

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PFRS 15 on Franchise Arrangements identifies two sources of revenue:

Performance obligations relate to:

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a. In return for continuing rights granted by the agreement

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Date Collection Interest Principal Unpaid Balance (PV)

7. c - Net income amounted to P390,673.82 – refer to No. 6.

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V – Initial Franchise Fee

VI – Initial Franchise Fee, Continuing Franchise Fee and Bargain Purchase

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Note: Bargain Purchases (Point in Time)

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Non-Refundable Upfront Fees

Non-refundable Upfront Initiation Fees: Right to Access (OT)

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5. On December 31, 20x8, the recognize revenue amounted to:

Prepayments, Coupons, Customer Options and Material Right

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B&F’s estimated stand-alone selling price of the discount option is:

The following are indicators of a consignment arrangement:

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A common principal-agent relationship involves consignments. In these cases, manufacturers (or

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Inventory on Consignment* account is credited for:

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Items 4 to 6 are based on the following information:

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5. The amount remitted to TS Co. for the month is

Items 7 to 9 are based on the following information:

11. What was the cost of inventory on consignment?

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Items 12 and 13 are based on the following information:

Items 14 and 15 are based on the following information:

15. The net income on consignment sales is:

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15. d – P5,775 (refer to No. 14 for computation)

GOD BLESS YOU ALWAYS!!!

Parting is a very sweet sorrow…

**Every great success was at the beginning impossible.**

**GOD’s LOVE is like a river that keeps on flowing…**

Page 19 of 19 0915-2303213/0908-6567516  www.resacpareview.com

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AFAR-05 (Licenses, Royalties, Franchises & Consignment)

AFAR-05 (Licenses, Royalties, Franchises & Consignment)

Every great success was at the beginning impossible.

GOD’s LOVE is like a river that keeps on flowing…