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AFAR02 04 Franchise Accounting
AFAR02 04 Franchise Accounting
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
Pre-PFRS 15
Problem 1:
On January 1, 2021, POGI Inc. entered into a franchise agreement with Potato Girl Inc.
to sell their products. The agreement provides for an initial franchise fee of P300,000
payable as follows: 50% to be paid upon signing of the franchise agreement and the
balance payable in three equal annual installments starting December 31, 2021, as
evidenced by a noninterest-bearing note. POGI is able to obtain a similar borrowing from
a bank at an interest rate of 8%. The franchise agreement further provides that POGI
must pay royalties of 3% of the monthly gross sales. The royalty is due at the 10th day
after the close of each month.
On September 1, 2021, Potato Girl Inc. completed the initial services (including staff
training) required in the contract at a total direct cost of P190,120 and indirect cost of
P18,000. The franchisee was able to commence operations on November 3, 2021. Gross
sales for the two months ended December 31, 2021 amounted to P200,000.
1. Assuming that the collectability of the note is reasonably assured, how much is the
net income for the year ended December 2021? [DO NOT ROUND OFF
PRESENT VALUE]
A. P97,880
B. P78,453
C. P87,043
D. P82,043
2. Assuming that the collectability of the note is not reasonably assured, how much
is the net income for the year ended December 2021? [ROUND OFF GROSS
PROFIT RATE TO XX.XX%]
A. P48,360
B. P61,948
C. P58,668
D. P67,792
Problem 2:
On November 30, 2021, Crowe Company authorized Velvet Company to operate as a
franchisee fee for an initial franchise fee of P2,000,000. Of this amount, 30% was received
upon signing the agreement and the balance, represented by a note that is due in four
equal annual payments starting November 30, 2022. The market interest rate for a similar
note is 5%. Crowe Company provided a 3-month refund period. Crowe has performed
substantially all of the initial services but the operations of the store have yet to start.
Collectability of the note is reasonably certain.
Problem 3:
On July 1, 2021, Burger Clean Inc., franchisor, entered into a franchise agreement with a
franchisee for the operation of a restaurant. The franchise agreement provides that the
franchisee will pay initial franchise fee of P3,000,000 with P500,000 to be paid upon
signing of the contract. The balance is evidenced by a 4% note with principal and interest
payments due every December 31 and June 30 starting December 31, 2021 until
December 31, 2023. The franchisee will also pay 5% of the restaurant’s gross revenue.
1|P a g e RFERRER/RLACO/ATANG/PDEJESUS
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
In 2021, Burger Clean incurred direct and indirect costs of P1,800,000 and P25,000,
respectively. The franchisee reported revenue of P400,000 and P1,000,000 for the year
2021 and 2022, respectively.
1. How much is the net income to be reported by Burger Clean for the year ended
2021?
A. P1,098,865
B. P965,429
C. P1,245,000
D. P1,295,000
2. Assuming that the collection of the balance is not reasonably assured, how much
is the net income to be reported by Burger Clean for the year ended 2022?
[ROUND OFF GROSS PROFIT RATE TO XX.XX%]
A. P520,000
B. P462,892
C. P486,816
D. P590,000
PFRS 15
Problem 3:
On January 1, 2021, Ichiraku Ramen Shop granted a franchise to a franchisee. The
franchise agreement required the franchisee to pay a nonrefundable upfront fee in the
amount of P600,000. The franchisee paid the upfront fee immediately on January 1, 2021.
Ichiraku Ramen considers each of the following item above is a distinct performance
obligation that is satisfied at a point in time.
Under the franchise agreement, the tradename will be transferred at the inception of the
contract. The franchisee’s stall was completed on February 1, 2021 while the equipment
and supplies were delivered on February 2, 2021.
Problem 4:
On January 1, 2021, Krusty Krab sold a franchise for five years, starting January 1, 2021,
which requires an initial franchise fee of P800,000. The agreement provides the customer
the right to the tradename and the secret formula for the famous Krabby Patties. Krusty
Krab assesses that the tradename and the secret formula are not distinct from one
another since the two are highly interrelated (i.e. Krusty Krab would not be able to fulfill
its promise by transferring each of them separately). The tradename and secret formula
are not sold separately by Krusty Krab. The franchise agreement provides the following
terms of payment: Down payment of P200,000; balance payable in equal installments at
the end of each year over the term of the franchise agreement. The balance is evidenced
by a 5% note.
2|P a g e RFERRER/RLACO/ATANG/PDEJESUS
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
On January 8, 2021, Krusty Krab incurs direct contract costs of P300,000 in relation to
the contract.
1. Assuming that Krusty Krab provides the franchisee the right to use the tradename
and secret formula and has transferred control on January 16, 2021, how much is
the gross profit on the franchise for 2021?
A. P530,000
B. P419,537
C. P500,000
D. P445,514
2. Assuming that Krusty Krab provides the franchisee the right to access the
tradename and secret formula over the term of the franchise agreement, how much
is the gross profit on the franchise for 2021?
A. P83,907
B. P130,000
C. P109,884
D. P100,000
Problem 5:
On January 1, 2021, an entity granted franchise to a franchisee. The franchise agreement
requires the franchisee to pay a non-refundable initial franchise fee of P1,500,000 and
sales-based royalty of 8% of the sales of the franchisee. The franchisee paid P500,000
upon signing of the agreement and the balance payable in four equal annual installments
starting December 31, 2021. The franchisee’s credit rating indicates that he can borrow
money at 7% for a loan of this type.
In relation to the non-refundable initial franchise fee, the franchise agreement required
the entity to render the following distinct performance obligations:
To construct the franchisee’s stall with stand-alone selling price of P600,000.
To deliver 20,000 units of raw materials to the franchisee with stand-alone selling
price of P750,000.
To allow the franchisee the access to the entity’s tradename for a period of ten
years starting January 1, 2021 with stand-alone selling price of P150,000.
On June 30, 2021, the entity completed the construction of the stall of the franchisee. As
of December 31, 2021, the entity was able to deliver 6,000 units of raw materials to the
franchisee. For the year ended December 31, 2021, the franchisee reported sales
revenue amounting to P600,000.
1. How much of the transaction price will be allocated to the construction of the
franchisee’s stall?
A. P600,000
B. P538,721
C. P673,401
D. P0
3|P a g e RFERRER/RLACO/ATANG/PDEJESUS
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
B. P134,680
C. P13,468
D. P0
4|P a g e RFERRER/RLACO/ATANG/PDEJESUS