Problem 1
On January 1, 2021, ABC co. grants a franchise the right to operate a
restaurant in a specific location using ABC's trade name concept and menu
over a 10-year period. The franchise agreement states an upfront fee of
P1,200,000, which includes P200,000 for kitchen equipment that ABC will
purchase for the franchisee, plus 10% royalty based on the franchisees'
sales. The P200,000 amount reflects the stand -alone selling price of the
equipment.
ABC regularly undertakes activities such as marketing research, product
development, advertising campaigns, and implementing operational
efficiencies and pricing strategies to support the franchise name.
ABC delivers the equipment on February 1, 2021. The restaurant opens on
April 1, 2021 at which date the license period starts to run. The franchisee
reports sales of P9,000,000 for the year.
Jan 1 2020
1,200,00
Cash 0
1,200,00
Contract liability 0
to record the receipt of initial franchise fee
Feb 1 2020
Contract Liability 200,000
Revenue 200,000
to record the receipt of the initial franchise fee
Dec 31 2020
Contract Liability 75,000
Revenue 75,000
(1M/10 yrs.) *9/12
to recognize revenue from the initial franchise fee allocated to the franchise license
Dec 31 2020
Cash 900,000
Revenue 900,000
(9M*10%)
to recognize revenue from the sales-based royalty
This study source was downloaded by 100000896870387 from [Link] on 02-26-2025 [Link] GMT -06:00
[Link]
Problem 2
On January 5, 2015 Ms. Nancy Lee signed and agreement to operate as a
franchise of street Pizza, Inc. for an initial franchise fee of P1,600,000. Of this
amount P600,000 was paid when the agreement was signed and the balance
payable in five annual payments of P200,000 beginning December 31, 2015.
Ms. Lee signed a non-interest bearing note for the balance. Ms. Lee credit
rating indicates that it can borrow money of 20% interest loan of this type.
The present value of an annuity of P1 at 20% for 5 periods is P2.9906. The
contract includes a continuing franchise fee of 5% of the franschisee's gross
sales to be collected in monthly.
On November 25, 2015, franchisor substantially performed the initial
services provided in the contract at a cost of P179, 718. The franchisee
commenced operations on December 31, 2015. The gross sales of Ms. lee for
the month of December is P80,000
Required:
Prepare all entries on the books of franchisor for 2015
1. Assuming the collection of the note was reasonably assured
5-Jan Cash 600,000
Notes Receivable 1,000,000
Unearned Interest Income 401,880
1,198,12
Deferred revenue from IFF 0
1,000,00
Face value of the notes 0
Less: Present value (200000*P2.9906) 598,120
Unearned Interest 401,880
25-Nov Deferred Cost of Franchise 179,718
Cash 179,718
31-Dec Cash 4,000
Revenue of CFF (80000*5%) 4,000
Cash 200,000
Notes Receivable 200,000
Adjusting Entries
This study source was downloaded by 100000896870387 from [Link] on 02-26-2025 [Link] GMT -06:00
[Link]
1. Unearned Interest
Income 119,624
Interest Income
(598,120*20%) 119,624
2. Cost of Franchise 179,718
Deferred Cost of franchise 179,718
3. Deferred Revenue form
FF 1,198,120
Revenue from FF 1,198,120
2. Assuming the collection of the note is not reasonably assured
5-Jan Cash 600,000
Notes Receivable 1,000,000
Unearned Interest Income 401,880
1,198,12
Deferred Revenue from FF 0
1,000,00
Face Value of the note receivables 0
Less: Present value (200000*2.9906) 598,120
Unearned Interest 401,880
25-Nov Deferred Cost of Franchise 179,718
Cash 179,718
31-Dec Cash 4,000
Revenue from CFF (80000*5%) 4,000
Cash 200,000
Notes Receivable 200,000
Adjusting Entries
1. Unearned interest income 119,624
Interest Income (598,120*20%) 119,624
2. Cost of Franchise 179,718
Deferred Cost of Franchise 179,718
3. Deferred Revenue of IFF 1,198,120
Cost of Franchise 179,718
Deferred Gross Profit-Franchise 1,018,402
This study source was downloaded by 100000896870387 from [Link] on 02-26-2025 [Link] GMT -06:00
[Link]
4. Deferred Gross Profit-Franchise 578,319.60
578,319.6
Realized Gross Profit -Franchise 0
Gross Profit 1,018,402/1,198,12
Rate 0 85%
(600,000+200,000-119,624) * 578,319.6
Realized Gross Profit 85% 0
This study source was downloaded by 100000896870387 from [Link] on 02-26-2025 [Link] GMT -06:00
[Link]
Powered by TCPDF ([Link])
