NATIONAL COLLEGE OF BUSINESS AND

ARTS

Name: Date:

Professor: Subject

Use the following information for the next two questions:

On January 1, 20x1, Franchisor Co. enters into a contract with Franchisee Co. The franchise contract
gives Franchisee Co. the right to use Franchisor’s trade name and the right to sell Franchisor’s
products for a period of 4 years. The franchise requires payment of an upfront fee of ₱1,000,000,
payable at contract inception, and 5% of future sales of the products, payable at each month-end.

The franchise contract requires Franchisor Co. to undertake activities that would further improve its
brand and its products, to which Franchisee Co. has rights, by continuously undertaking research
and development projects and marketing and promotional activities. Although those activities do
not result in the transfer of a good or a service to Franchisee Co. as those activities occur, it is
expected that Franchisee Co. will benefit from those activities.

All of the necessary preparations were completed, and TIPPLE Co. started operations, on January
31, 20x1.

1. How should Franchisor Co. recognize revenue from the ₱1,000,000 initial franchise fee?
a. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 1, 20x1.
b. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 31, 20x1.
c. Recognize the ₱1,000,000 initial franchise fee as revenue throughout the license period.
d. Any of the above, as a matter of accounting policy choice.

2. How should Franchisor Co. recognize revenue from the 5% of sales continuing franchise fee?
a. Franchisor Co. shall estimate the variable consideration and amortize it as revenue over the
license period.
b. Franchisor Co. shall estimate the variable consideration, subject the estimate to the
“Constraining estimates of variable consideration” principle of PFRS 15 and amortize it as
revenue over the license period.
c. Franchisor Co. shall discount the amount determined in Choice (b) above and amortize it as
revenue over the license period.
d. Franchisor Co. shall recognize revenue equal to 5% of Franchisee’s sales as and when those
sales occur.
Use the following information for the next two cases:

On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a fixed
fee of ₱100,000 payable as follows:
● 20% is payable upon signing of contract.
● 80% is represented by a note receivable collectible in 4 equal annual installments starting December
31, 20x2. The appropriate discount rate is 12%.

Case #1:

3. The license provides Customer X the right to use Entity A’s patented processes. Customer X
continues to operate using its trade name and has the discretion of developing a new product
name for the products it will produce using the patented processes. The license does not
explicitly require Entity A to undertake activities that will significantly affect the intellectual
property to which Customer A has rights. Neither does Customer X expect that Entity A will
undertake such activities. Entity A grants the license to Customer X on December 31, 20x1. How
much revenue from the franchise contract will Entity A recognize in 20x1?
a. 80,747
b. 21,187
c. 20,000
d. 0

Case #2:

4. The license provides Customer X the right to use Entity A’s patented processes. The agreement
requires Customer X to discontinue using its trade name and instead use Entity A’s trade name.
Customer X is bound by the terms of the contract to abide with Entity A’s policies on the use of
the processes but is given the right to any subsequent modifications to the processes. How much
revenue from the franchise contract will Entity A recognize in 20x1?
a. 80,747
b. 20,187
c. 20,000
d. 0

5. On January 2, 2020 Siomai house, Authorized Juan Dela Cruz to operate franchise for an initial fee of
750,000. Of this amount, 300,000 was received as down payment upon signing the agreement, and
the balance represented by a 12% note due in three annual payments, beginning December 31,
2020. Siomai house rendered the required initial services at cost of P187,500 and Juan Dela Cruz was
able to operate the franchise on April 27, 2020.

Assuming the collection of the note is not reasonably assured, the realized revenue from the initial
franchise on December 31, 2020

a. P360,000
b. P391,500
c. P337,500
d. P300,000

6. Using the data in no#5 but assuming the collection of the note is reasonably assured the net income
to be presented in its income statement on December 31, 2020
 a. P654,000
b. P616,500
c. P650,000
d. P750,000

7. Mr. Toledo is about to purchase a franchise from Jollibee Inc. the standard contract provides for a 10
years term and an initial franchise fee of P450,000 payable as follows: P150,000 at the date of
signing. The expected date of signing is January 1 2020. A continuing franchise fee of 2% of gross
sales is also to be paid to the franchisor monthly gross sales are expected to be 200,000 for the first
four years and 375,000 for the remainder of the contract. An additional P50,000 for initial services
are incurred on January 17, 2020. There are no associated continuing costs.

What is the net income to be recognized by Jollibee Inc. for the fiscal year ending December 31,
2020 assuming that the franchisor started operation on March 1, 2020.

a. P144,000
b. P444,000
c. P448,000
d. P440,000

8. On January 1, 2020, Mcdo Corp. sold a franchise to Mr. Baldovino for 10,000,000 for the right to
operate as a franchisee of Mcdo Corp. terms of the franchise contract are:

1. The initial franchise fee of P1,000,000 is payable in cash, when the contract is signed and the
balance in five equal installment every December 31, evidenced by a 12% promissory note.

2. The franchisor will assist in locating the site, supervisor construction activities and training of
management and employees.

On December 31, 2020 Direct cost of services rendered to the franchisee amount to P2,000,000

Assuming that there is substantial performance of services required in the contract and the
collectability of the note is reasonably assured, using the installment method how much the net
income is to be recognized by Mcdo Corp. on December 31, 2020?

a. 9,080,000
b. 1,880,000
c. 3,320,000
d. 2,800,000

9. ABASE HUMILIATE Co. is currently preparing its combined financial statements for the year
ended December 31, 20x1. As of this date, the “Investment in branch” account has a balance of
₱380,000 while the “Home office” account has a balance of ₱528,000. The following information
has been gathered:
a. The home office allocated unpaid utilities expenses amounting to ₱40,000 to the branch which
the branch did not record in full. Instead, the branch sent a wrong adjusting memo to the home
office reducing the charge by ₱10,000 and setting up a liability for the remaining amount.
b. The home office erroneously credited the branch for a return of shipment of merchandise worth
₱100,000. The branch did not make any return of merchandise.
c. The branch mistakenly received a copy of the home office correcting entry for item (b) above
dated January 3, 20x2 and entered a credit in favor of the home office on December 31, 20x1.
d. The branch mistakenly sent the home office a debit memo amounting to ₱12,000 for an apparent
remittance of collections which did not happen. The home office did not record the debit memo.

How much is the net adjustment to the “Investment in branch” account? increase (decrease)
a. 100,000
b. 48,000
c. (48,000)
d. (52,000)

Use the following information for the next eleven questions:

The following information was taken from the records of a branch:
Sales by branch 2,800,000
Billings to branch by home office 2,500,000
Operating expenses 400,000
Ending inventory at billed price 1,000,000

The following information was taken from the records of the home office:
Branch current account 2,600,000
Shipments to branch 2,000,000
Allowance for markup - Unadjusted 500,000

10. What is the billing rate based on cost?

a. 20% b. 25% c. 120% d. 125%

11. What is markup percentage based on cost?

a. 20% b. 25% c. 120% d. 125%

12. How much is the sales of branch to be included in the combined financial statements?
a. 2,800,000 b. 2,240,000 c. 2,333,333 d. 0

13. How much is the realized markup of the branch?

a. 300,000 b. 240,000 c. 380,000 d. 270,000

14. How much is the cost of goods sold of the branch to be included in the combined financial
statements?
a. 1,500,000 b. 1,800,000 c. 1,200,000 d. 900,000
15. How much is the ending inventory of the branch to be included in the combined financial
statements?
a. 1,000,000 b. 8333,333 c. 1,250,000 d. 800,000

16. How much is the unrealized markup in ending inventory?

a. 200,000 b. 166,667 c. 230,000 d. 266,667

1. How much is the ending balance of the “allowance for markup” account before combining the
financial statements?
a. 200,000 b. 166,667 c. 230,000 d. 266,667

2. How much is the individual profit of the branch?

a. 880,000 b. 900,000 c. 920,000 d. 1,020,000

3. How much is the true profit of the branch?

a. 1,200,000 b. 1,400,000 c. 1,250,000 d. 1,266,667

4. How much is the adjusted balance of the branch current account immediately prior to
combining the financial statements?
a. 3,200,000 b. 3,400,000 c. 3,500,000 d. 3,666,667

Bulkan Pinatubo company is engage in trading of merchndise both its Home office in Pampanga and
at its branch in subic city. Selected accounts taken from the trial balance of the home office and the
branch as of December 31, 2010. Follows:

Debits Pampanga Subic

Inventory, Jan 1, 2010 23,000 11,550

Subic Branch 58,300

Purchases/Shipment from HO 190,000 105,000

Freight In from Home office 5,500

Sundry expenses 52,000 28,000

Credits

Home Office 53,300

Sales 155,000 140,000

Sales to Branch 110,000

Allowance for Overvaluation of Branch Inv. Jan 1, 2010 1,000

Additional information:

- Subic branch gets all of its merchandise from the home office. The home office bills the goods
at cost plus 10% markup at December 31, 2010, a shipment with billed value of P5,000 was
still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory.
- Inventories on December 31, 2005, excluding that shipment in transit, follow:

Home office, at cost P 30,000

Branch billed price (excluding freight of 520) P10,400

5. What is the combined net income (loss) of the Home office and the branch on December 31, 2010?
a. P30,740
b. 20,870
c. (10,000)
d. (30,470)

6. ABOMINABLE VERY BAD Co. has several branches. On December 31, 20x1, the “Investment in
Branch One” maintained by the home office shows a balance of ₱400,000 while the “Home office”
account maintained by Branch One shows a balance of ₱568,000. The following information was
determined:
a. Branch Two acquired equipment for ₱120,000 to be maintained in the books of the home office.
This was recorded by the home office as a transaction with Branch One.
b. Branch One acquired equipment for ₱160,000 to be maintained in its books. This was not
recorded by the home office.
c. Branch Four remitted cash collections of ₱40,000 to the home office which the latter failed to
record.
d. The home office erroneously charged Branch One for a debit memo of ₱48,000 received from
Branch Five.
e. Branch One reversed a previous debit memo from Branch Six amounting to ₱24,000. The home
office decided that this charge is appropriately Branch Seven’s cost.

How much is adjusted balance of the “Home Office” account?

a. 568,000 b. 588,000 c. 628,000 d. 658,000

7. AMNESTY PARDON Co. is currently preparing its combined financial statements. At December
31, 20x1, the home office shows a ₱624,000 balance in its “Investment in branch” account while the
branch showed a ₱280,800 balance in its “Home office” account. The following information has
been gathered:
a. The home office shipped merchandise worth ₱80,000 to the branch during December 20x1
which the latter has received and recorded only in January 20x2.
b. The home office collected ₱40,000 accounts receivable on behalf of the branch. The branch did
not yet receive the credit memo sent by the home office.
c. The branch returned damaged merchandise worth ₱120,000 to the home office. The home
office did not yet receive the debit memo sent by the branch.
 d. A remittance of cash collections amounting to ₱160,000 was not yet recorded by the home
office.
e. The home office allocated overhead cost of ₱20,000 to the branch which the latter has recorded
twice.
f. Freight charge of ₱48,000 paid by the home office for shipments of merchandise to the branch
was recorded by the latter as ₱4,800.

How much is the adjusted balance of the “home office” account?

a. 324,000
b. 344,000
c. 354,000
d. 364,000

8. The combined profit of the entity is equal

a. to the individual profits of the home office and the branch.
b. to the individual profits of the home office and the branch after eliminating any unrealized
mark-up during the period.
c. to the individual profit of home office plus the true profit of the branch.
d. to the true profit of the home office plus its share in the profit of the branch.

9. ASTATIC UNSTABLE Co. is currently preparing its combined financial statements. At

December 31, 20x1, the home office shows a ₱728,000 balance in its “Investment in branch”
account. The following information has been gathered during the reconciliation process:
a. A credit memo sent by the home office to the branch amounting to ₱48,000 was not recorded
by the branch.
b. A debit memo sent by the home office to the branch amounting to ₱36,000 was not recorded by
the branch.
c. A credit memo sent by the branch to the home office amounting to ₱80,000 was recorded by
the home office twice.
d. A debit memo sent by the branch to the home office amounting to ₱120,000 was recorded by
the home office as ₱12,000.
e. The branch sent by mistake a credit memo amounting to ₱28,000 to the home office. The home
office did not record it.

How much is the unadjusted balance of the “Home office” account?

a. 450,000

b. 540,000

c. 580,000

c. 620,000
“Success is no accident, it is HARDWORK, PERSEVERANCE, LEARNING, STUDYING,
SACRIFICE and most of all LOVE of WHAT YOU ARE DOING or LEARNING TO DO.”