— Chapter 6 Revenue Recognition — Franchise Accounting 1. Introduction pubes beter one company grants business rights to another individual through a Contract to operate a franchised businesscis Chapter 5 32 = i shi i franchise fees: \ Franchi initial franchise fee and continuing eee crises commen 1,000,000 (Adapted) | . On September 30, 2016, Criselda's, Inc. received from Ambo P550,000 representing franchise fee. Franchise services were immediately started by Criselda's and these were completed on October 31 2016 at cost amounting _to P330,000. The franchise fee revenue to be reported by Criselda’s in its: October 31, 2016 income statement is:316 12. 13. Chapter 6 terprises, a franchisor, charges franchisees a “franchise fee” of 500,000, Ofte amouni, a nonrefundable P200.000 is paid upon the signing of the Contract with the balance payable in three equal installments after each year thereafter starting 2017. PJD will assist in locating a suitable business site, Conduct a market study, oversee the construction of facilities, and provide initial training for employees. ‘On October 1, 2016, PJD entered into a franchising agreement to cover an entirely new and untested area. By December 31, 2016, PJD had obser completed and rendered appropriate services at a total cost of P150( but, somehow, has raised some doubts on the collectibility of the balance ‘of the franchise fee. In its 2016 income statement, PJD Enterprises should recognize profit of: a. P 50,000 . 200,000 b. 140,000 d. 350,000 (Adapted) 2D, Inc. awarded its franchise for Surigao City to Palatabie is fora | total fee of P250,000, payable P50,000 at the tir ‘and the balance in fwo equal ins pron Silene 1 signing date. The agreement was signed at the end of 2016 a among others, that in the event the first year’s operation 1 ° unprofitable the franchise agreement may be voided. So far. no service t been performed. in: JID would report franchise for revenue of:aevemue Recosnition Franchise Accounting 15. Ruby Co. charges new franchisees an initial fee of P2,500,000. Of this amount, P1,000,000is payable in cash when the agreement is signed, and the remainder is to be paid in three equal annual installments which are evidenced by interest-bearing promissory notes. In consideration therefore, Ruby Co. will assist in locating the business site, conduct a market study to estimate earnings potential, supervise construction of a building, and provide initio! training to employees. On December 3, 2016, Ruby Co. entered into a franchising ogreement sv with Jade, Inc. by the end of the year, Ruby Co. has completed about 25% the initial services at a cost of P150,000 andit ios oscetained of the notes is reasonably assured. For 2016, Ruby franchise revenue of:Chapter 5 318s atc us . ise agreement with Rusty. As per agreement ~ ee ere ee sole. Rusty & 10 poy Ferragamo an up-front franchise fee of £1.600000 and subsequent annual franchise fees of P50,000 over the next four years. Cost of initial franchise services rendered by Feragamo's dung , the year is P250,000 which is substantial, andit estimates the cost of subsequent annual services to be P10,000. Rusty paid the annual franchises fee for 2017, and Feragamo's rendered the services for the year. In its December 31, 2017 income statement, the amount of realized franchise fee revenue to A be reported by Ferragamo's is: a. 25,000 ©. P250,000 : i ‘b> 50,000 d. 300,000 3 18. Nena's Lechon, Inc. franchiser, entered into franchise agreement with Aling ___ Nena, franchisee, on March 31, 2016. The total franchise fee is P500,000, of esp 100.000 s payable upon signing and the balance in four equal annuel installments. The downpayment is refundable in the ev : _ fails torender services and none thus far C a itemerpevenue Recognition — Franchise Accounting 0. On December 29, 2016, Pizza Hot signed a franchising agreement for the operation of an outlet in Dagupan City by Nipa Co. The franchising agreement required the franchisee, Nipa Co., fo make an initial payment ‘of P200,000 upon signing of the contract and three payments each of P100,000 beginning one year from the agreement date and yearly thereafter. — The franchisor agrees to make market studies, find a suitable location. train — employees, and perform some other related services by next year. The ini payment is refundable until substantial performance is effected. At th fend of 2016, Pizza Hot should report franchise fee revenue ofSS Revenue Recognition ~ Franchise Accounting 25 321 Saisaki Corporation grants a franchise to Mity for an initia! franchise fee of P1,000,000. The agreement provides that Saisaki has the option within one year to acquire franchisee's business, and it seems certain that Saisaki will exercise this option. On Saisaki's books, how should the initial fee be recorded? a. Deferred and treated Qs reduction in Saisaki investment when the option is exercised. b. Realizedrevenue c. Extraordinary revenue d. Deferred revenue to be amortized (Adapted) . On September 1, 2016, Cindy Company entered into franchise agreements _ with two franchisees. The agreements required an initial fee Povreaeel £700,000 pplus four P300,000 payments due every four (4) months, the payment due December 31, 2016. The market interest rate is 12%. The initial deposit is refundable until substantial perfc The, describesTS itial franchise fee of P115,000, with P25,000 paig ecm GNRITY NOG: Se sod and the balance in five annual payments, Tree entwalue of the future payments, discounted at 10% is P68.234, Ms Bees inacoWonto purchase P15,000 of: equipment for P12,000. Chemy “hos substantially provided all intial services required and collectibility of the is is reasonably assured. The amount of revenue from franchise fees is: fe P25,000" Cc. P93,234 5 "90.234 d. 115,000 (Adapted) ‘On January 1, 2016, Brownie Delight, Inc. entered into a franchise agreement _ __ with a company allowing the company to do busienss under Brownie Delight’s _ name. Brownie Delight had performed substantially all required services by _ January 1.2016, and the franchisee paid the initial franchise fee of P70,000in that date. the franchise agreement specifies that the franchisee must < franchise fee of P6,000 annually, e 9n advertising by Brownie Delight. What entry 1SRevenue Rec nition ~ Franchise Accounting = 29. On April 1, 2016, Motorola, Inc. entered into a franchise agreement with a local businessman. The franchisee paid P45,000 and gave a P30,000, 8%, 3 year notes payable with interest due annually on March 31. Motorolarecorded the P75,000 initial franchise fee as revenue on April 1, 2016. On December 30, 2016, the franchisee decided not to open the outlet under Motorola's name. Motorola cancelled the franchisee's note and refunded P24,000 less accrued interest on the note, of the P45,000 paid on April 1. What entry should Motorola make on December 30, 20162 a. Loss on Repossessed Franchise 24,000 Cash... 24,000 22.200 | b. Loss on Repossessed Franchise Cash . c. Loss on Repossessed Franchise Cash. Notes d. Revenue from Franchise Fees Interest Income Cash - Notes Receivable . Pevenue from Repossessed Franchise .. FRS (PFRS) 15 based x 30. eeteheinc-chorges tial franchise eae7“ 7 — Che Mer 6, 324 a ite, Inc. charges an initial franchise fee of P90,000 broken down og 31. Cerette, Inc. follows: : Rights to trade name, market area, an Poa 1 “proprietary know-how .. signi ent, c payment of P40,000 is due. Thereafter, Mvo cnsual payments of a0 000 bie raquied. The credit rating at ies franchisee is such that it would have to pay interest of 8% to borrow money, The franchise agreement is signed on Augus! 1. 20x8, and the franchise ommences operation on November |, 20x8. AssUme that the total training fees includes training services for the period leading up to the franchise gpening (P5,500 valde} and for 3 months following Opening. The journal entry on August 1, 20x8 wouid include: Q. accredit fo Unearned Service Revenue for P11,500. . b. acredit fo Unearned Service Revenue for P6,000. ¢. a debit to Sales Revenue for P38,500. d. adebit to Unearned Franchise Revenue for P40,000. 32. Recognition of Franchise Rights Revenue Ovs Time. Xaviery Computers is a franchisor and pre services Bo ere BOOS isloshonay gyncing, and network solutions) on popular PE devices. Each ronchise oereer oot esau 2 a Xaviery outlet and sell Xavierys’ products and services in the area for five (5) years. Under the contract, foviey, also provides the franchisee with a number of services to support and enhance the franchi: it ir ‘ising and consulting on the operati. new hardware ond sofware developments, ond savice techniques. Providing business and training manuals ond advertising programs and _ feb 20 almost entirely service operation (all materials a1 st gre purchased as needed by Gustomed) Xaviery pee services to franchisees. Instead, the franchisee recruiis iven Xavi training materials (online Manuals and e updated technology ces on a mont intoa sah hise agreement on lo oper 2 e the tights years Raviely GREE a Xpevenue Recognition ~ Franchise Accounting The following arises based on the facts given: The "Rights 10 the trade name, markel ered, oni for 5 years are not individually distinct. » Each oneis not sold separately and cannot be used with other goods or services that are readily available to the franchisee. : « _ licensed rights and the ongoing training materials are a single : performance ‘obligation. aviery is providing access to the rights and must continue (over time) to perform updates and services. . Not reasonably assured to be entitled to those revenue-based royalty. amounts. Payments represent variable consideration. aes . 3 Recognize revenue for royalties when (or as) uncertainty is resolved. \d proprietary know-how . The amount of franchise revenue on December 31, 20x7 amounted to: a. Nil c. P_ 975,000 tb. _ P195,000 dd. P1,043,250 Using the same information in N. 32, the franchise revenue on 31.2088, franchise begins operations in January 20x8 | of revenue for the year ended December 31. 208: a. P 195,000 es “b. P1,160.250 a 34. Franchise fees should be ecoones ~~a. on the date the c« on the date the ‘1 the je’ the francnis