ACCOUNTING FOR FRANCHISE
1. On December 31, 2011, Mcqueen,
Inc. authorized Mr. Chun to operate as a franchisee for an initial franchise
fee of P150,000. Of this amount, P60,000 was received upon signing the
agreement and the balance represented by a note due in three annual payments of
P30,000 each beginning December 31, 2012. The present value on December 31, 2011,
for three annual payment appropriately discounted is P72,000. According to the
agreement, the non- refundable down payment represents a fair measure of the
services already performed by Mcqueen and substantial future services are still
to be rendered. However, the collectibility of the note is not reasonably
assured. Mcqueen’s December 31, 2011, balance sheet unearned franchise fee from
Mr. Chun’s franchise should report as:
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a. P132,000
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b. P100,000
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c. P - 0 -
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d. P72,000
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2.
On December 31, 2011, Maxes Inc. signed an agreement
authorizing Antoks Company to operate as a franchise for an initial franchise
fee of P50,000. Of this amount, P20,000 was received upon signing of the
agreement and the balance is due in three annual payment of P10,000 each,
beginning December 31, 2012. No future services are required to be performed. Antoks
Company’s credit rating is such that collection of the note is reasonably
assured. The present value at December 31, 8 of the three annual payments
discounted at 14% (the implicit rate for a loan of this type) is P23,220. On
December 31, 2011, Maxes should record earned franchise fees of:
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a. P23,220
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b. P43,220
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c. P30,000
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d. P 0
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3.
On December 31, 2011, Jollikod Company signed an
agreement to operate as franchisee of Mcdonut’s for a franchise fee of P80,000.
Of this amount, P30,000 was paid upon signing of the agreement and the balance
is payable in five annual payments of P10,000 each beginning December 31, 2012.
The present value of the five payment, at an appropriate rate of interest, is
P56,000 at December 31, 2011. The agreement provides that the down payment is
not refundable and no future services are required of the franchisor. The
collection of note receivable is reasonably certain. Mcdonut’s Company should
report unearned revenue from franchise fee in its December 31, 2011 balance
sheet at:
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a.
P80,000
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b.
P30,000
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c.
P66,000
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d.
P 0
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4.
Each of the Yellowwich Pizza Company’s 21 new
franchisees contracted to pay an initial franchise fee of P30,000. By December
31, 2010, each franchise had paid a nonrefundable P10,000 fee and signed a note
to pay P10,000 principal plus the market rate of interest on December 31, 2011,
and December 31, 2012. Experience indicates that five franchisees will default
on the additional payments. What amount of earned franchise fees would
Yellowwich Pizza Company report at
December 31, 2010:
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a.
P400,000
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b.
P610,000
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c.
P600,000
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d.
P530,000
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5.
Slater, Inc. grants a franchise to Mr. Greenwitch
for an initial franchise fee of P1,000,000. The agreement provides that Slater,
Inc. has the option within the one year to acquire franchisee’s business and it
seems certain that Slater, Inc. will exercise the option. On Slater, Inc.
books, how should the initial franchise fee be recognized?
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a. Deferred revenue and to be amortized.
b. Realized revenue.
c. Extraordinary revenue.
d. Deferred revenue and
treated as a reduction from Pizza’s investment when the option is exercise.
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6.
On Dec. 29, 2011, STARBACKS signed a franchising
agreement for the operation of an outlet in Dagupan City by Sombrero Co. The
franchising agreement required the franchisee, Sombrero Co., to 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 prepare market studies, find a suitable location, train
employees, and perform some other related services. The initial payment is
refundable until substantial performance is effected. In 2011, STARBACKS should
report franchise fee revenue of:
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a.
P-0-
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b.
P200,000
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c.
P125,000
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d.
P500,000
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7.
Shakehut, franchisor, entered into a franchising
agreement with Jo Levy, franchisee, on October 31, 2011. The total franchise
fee is P500,000, of which P100,000 is payable upon signing of the agreement
with the balance payable in four equal annual installments. The down payment is
refundable in the event the franchisor fails to render stipulated services and,
thus far, none has been performed. When Shakehut prepares its October 31, 2011
financial statements, the franchise fee revenue to be reported is:
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a. -
0 -
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b.
P400,000
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c.
P100,000
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d.
P500,000
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8.
The franchise agreement between Jolly-R and Mr.
Chris which was signed at the beginning of the year required a P500,000
franchise fee payable P100,000 upon signing of the franchise and the balance in
four annual installments starting the end of the current year. At the time of the
granting of the franchise, the present value using 12% as discount rate of the
four installments would approximate P199,650. The fees once paid are not
refundable. The franchise may be cancelled subject to the provisions of the
agreement. Should there be unpaid franchise fee attributed to the balance of
main fee (P500,000), same would become due and demanable upon cancellation.
Further, the franchisor is entitled to a 5% fee on gross sale payable monthly
within the first ten days of the following month. The Credit Investigation
Bureau rated Mr. Chris as AAA credit rating. Further the balance of the
franchise fee was guaranteed by a commercial bank. The first year of operations yielded gross
sales of P9 million. As of the signing of the franchise agreement, Jolly-R’s
unearned franchise fee amounted to
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a. P649,650
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b.
P400,000
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c.
zero
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d.
P199,650
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9.
Croley Snack granted a franchise to Eat N Eat for
the Ortigas area. Eat N Eat was to pay franchise fee of P100,000 payable in
five equal annual installments starting with the payment upon signing of the
agreement. The franchise was to pay monthly 1% of gross sales of the preceding
month. Should the operations of the outlet prove to be unprofitable, the
franchise may be cancelled with whatever obligations owing Croley Snack in
connection with the P100,000 franchise fee waived. The first year generated a
gross sales of P500,000. Croley Snack earned franchise fee for the first year
amounted to
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a. P5,000
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b.
P25,000
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c.
P105,000
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d.
P20,000
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10.Kitchenics Inc.
awarded its franchise to Wings Co. in Cebu for a total fee of P100,000. Of said
amount, P50,000 was payable upon the signing of the franchise agreement and the
balance, payable in two annual payments of P25,000 each. Kitchenics had been
very successful in Metro Manila with 100 franchisees but Cebu was the first
outside Metro Manila. Kitchenics’ agreement with Wings provided that in the
event the first year of operations would result to an operating loss, the
franchising agreement may be cancelled without need of returning any portion of
paid franchise fee and there would be no need to pay any balance of the unpaid
franchise fee. The entry to record the
granting of the franchise to Wings was
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a.
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Cash
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P50,000
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Notes receivable
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50,000
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Unearned franchise fee
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P100,000
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b.
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Cash
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50,000
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Notes receivable
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50,000
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|
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Revenue from franchise fee
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|
50,000
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|
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Unearned franchise fee
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50,000
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|
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|
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c.
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No entry
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d.
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Cash
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50,000
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Notes receivable
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50,000
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Revenue from franchise fee
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100,000
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11.On December 31, 2011,
Mc Dowell Inc. signed an agreement authorizing MN Co. to operate as a franchise
for an initial franchise fee of P50,000. Of this amount, P20,000 was received
upon signing of the agreement and the balance is due in 3 equals annual
payments beginning December 31, 2012. The agreement provides that the down
payment (representing a fair measure of services already performed by Mc
Dowell) is not refundable and no substantial future services are required to be
performed. MN Co.’s credit rating is such that collection of the note is
reasonably assured. The implicit interest rate on this type of loan is 14%. On
December 31, 2011, Mc Dowell should record unearned franchise fees of
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a. P23,220
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b.
P42,220
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c.
P30,000
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d.
-- 0 --
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12.Corny Island Inc.
sells franchises for ice cream outlets in Metro Manila. One contract has been
signed on January 15,2011. The agreement calls for an initial franchise fee of
P6,000,000 to be paid by the franchise upon signing of the contract. The
franchisor initial cost of services is P2,250,000 to be incurred uniformly over
the 6 month period / prior to the scheduled opening date of July 15, 2012. No
return payments are to be made by the franchisor, although there will be
continuing costs of P180,000 per year for services rendered during the 10 year
term of contract. The normal return for the franchisor on continuing operation
involving franchise outlets is 10%. How much net income would be recognized by
the franchisor on July 15, 2012?
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a. P3,750,000
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b.
P6,000,000
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c.
P5,750,000
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d.
P1,750,000
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13.On January 1, 2011
Dokito Inc. authorized Mr. T to operate as franchise for an initial franchise
fee of P150,000. Of this amount, P60,000 was received upon signing the
agreement and the balance, represented by a note, is due in a 3 annual payments
of P30,000 each beginning December 31, 2011. The present value on January 1, 2011,
for three annual payments appropriately discounted is P72,000. According to the
agreement, the non-refundable down payment represents a fair measure services
already performed by Dokito and substantial future services are still to be
rendered. However, collectibility of the note is reasonably certain. Dokito’s
December 31, 2011 balance sheet, unearned franchise fees from Mr. X franchise
should be reported as
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a. P132,000
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b.
-- 0 --
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c.
P100,000
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d.
P72,000
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14.Each of Picha Pie
Co’s. 21 new franchisees contracted to pay an initial franchise fee of P30,000.
By December 31,2011, each franchise had paid a non- refundable P10,000 fee and
signed a note to pay P10,000 principal plus the market rate of interest on
December 31, 2012 and 2013. Experience indicates that one franchise will
default on the additional payments. Services for the initial fee will be
performed in 2012. What amount of net unearned franchise fees would Picha
report at Dec. 31, 2011?
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a. P400,000
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b. P600,000
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c. P610,000
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d. P630,000
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15.At the beginning
of the year, Aji Sho got the franchise of Bistek, a known steak house of
upscale patronage. The franchise agreement required a P500,000 franchise fee
payable P100,000 upon signing of the franchise and the balance in four annual
installments starting the end of the current year. At present value using 12%
as discount rate, the four installments would approximate P303,735. The fees
once paid are not refundable. The franchise may be canceled subject to the
provisions of the agreement. Should there be unpaid franchise fee attributed to
the balance of main fee (P500,000), the same would become due and demandable
upon cancellation. Further, the franchiser is entitled to a 5% fee on gross
sales payable monthly within the first ten days of the following month. The
Credit Investigation Bureau rated Aji Sho as AAA credit rating. The balance of
the franchise fee was guaranteed by a commercial bank. The first year of
operations yielded gross sales of P9 million. Bistek’s earned franchise fees
from Aji Sho for the first year of operation, amounted:
a.
P950,000 b.
P853,735 c. P500,000 d. P403,735
