PrE1 – Accounting for Special Transactions

Franchise and Consignment

Answer key

1.

Answer: P25,000
Franchise fee earned during the year:
Down payment (100,000/5) P20,000
Continuing franchise fee (500,000x 1%) 5,000
P25,000

2. In relation to no. 1, the unearned franchise fee after the first year is:

Answer: P55,964
Unearned franchise fee must be equal to the present value of installments because the franchisee has
an option to cancel the franchise should the outlet prove to be unprofitable.
100,000/5 = 20.000 x 2.798 = P55,964

3.
Answer: P-0-
The franchise fee must be P-0-. The fee is still refundable because no services were performed yet by
the franchisor.

4.
Answer: P610,000
Down payment (21 × 30,000) P630,000
Less: Default (2 additional payments) ( 20,000)
Unearned franchise fee, December 31, 2018 P610,000

5.
Answer: P49,140
Down payment P20,000
Installments (10,000x2.914) 29,140
P49,140

6.
Answer: P1,100,000
The entire fee is still considered unearned, because of lack of substantial performance of services by
franchisor.

7.
Answer: B P220,000
Income from franchise (550,000 – 330,000) P220,000

CSA
8.
Answer: C. P64,623
Unearned franchise fee must be equal to the present value of franchise fee:
Down payment P25,000
Installments 39,623
P64,623

9.
Answer: P7,000,000

10
Answer: P-0-
Even though the fee is no longer refundable but there is no substantial services performed by the
franchisor, then the entire franchise fee of P7,000,000 is still considered unearned. The answer must be
zero.

11.
Answer: P-0-
Even though substantial services were already performed by the franchisor, but the refund period has
not expired, then the entire fee is still considered unearned. The answer must be zero.

12.
Answer: P-0-
The down payment is still considered unearned, because there is no substantial services performed by
the franchisor related to the down payment. Therefore, the answer must be zero. The note is not
recognized as an asset.

13.
Answer: P1,000,000
If the franchisor has the option to acquire the franchisee business, all franchise fee paid by the
franchisee will be considered unearned by the franchisor and these will be deducted from the cost of
franchisors investment.

14.
Answer: P490,000
Downpayment P100,000
Instalment (P100,000x 3.9) 303,700
Total 403,700

15.
Answer: P-0-

CSA
 16. C
Solution:
Gross profit from sale (excluding freight) (72K x 12.5%) 9,000
Freight (2K x 6/10) (1,200)
Commission (adjusted) (72K x 5%)… not 10% (3,600)
Selling expenses (800)
Installation and delivery (1,200)
Profit 2,200

17. A
Solution:
Total sales [2,100,000 x (8-3)] 10,500,000
Cost of goods sold (a) (5,125,000)
Gross profit 5,375,000
Commission (b) (1,750,000)
Finder's fee (5% x 1,750,000) (87,500)
Delivery, installation and testing (50,000 x 5) - 5,000 scrap (245,000)
Profit 3,292,500

(a)
Cost of goods sold is computed as follows:
Unit cost 1,000,000
Freight per machine (200,000 ÷ 8) 25,000
Total unit cost 1,025,000
Multiply by: No. of machines sold 5
Cost of goods sold 5,125,000

(b)
The commission is computed as follows:
We will use the following formula for bonus after bonus:

B = P – [P ÷ (1 + Br)]

Commission = Gross sales – [Gross sales ÷ (1 + Commission rate)]

Commission = 10,500,000 – [10,500,000 ÷ (1 + 20%)]
Commission = 10,500,000 – 8,750,000
Commission = 1,750,000

18. B
Solution:
Total sales [2,100,000 x (8-3)] 10,500,000
Commission (1,750,000)
Finder's fee (87,500)
Delivery, installation and testing (50,000 x 5) - 5,000 scrap (245,000)
Net remittance 8,417,500

CSA
 19. A
Solution:
Unit cost before freight 1,000,000
Freight per machine (200,000 ÷ 8) 25,000
Total unit cost 1,025,000
Multiply by: No. of unsold machines 3
Ending inventory 3,075,000

20. A (20 x 1,600) = 32,000

CSA