PRACTICAL ACCOUNTING 2 (SY.

2017 – 2018) - FRANCHISES

NAME:________________________________________________ DATE:__________________
1. What determines substantial performance for purposes of recognizing the initial
franchise fee?
a. When the franchisee actually commence operation.
b. When the franchisee pays the initial franchise fee in full.
c. When the franchisee pays a cash downpayment.
d. When the franchisee signs the franchise contract.

2. Pizza Inc. Grants a franchise to Mr. Manuel for an initial franchise fee of
P1,000,000. The agreement provides that Pizza, Inc. has the option within one year to
acquire franchisee’s business and it seems certain that Pizza Inc. will exercise this
option. On Pizza, Inc., books, how should the initial franchise fee be recognized?
a. Deferred revenue to be amortize
b. Realized revenue
c. Extraordinary revenue
d. Deferred revenue and as reduction from Pizza’s investment when the option is
exercise.

3. When the initial franchise fee is not paid in full and the collectability of the note
for the balance is not reasonably assured, the method to be used by franchisor to
recognize revenue from the initial fee is:
a. Installment method c. Accrual basis
b. Gross profit method d. Cost method

4. What conditions are to be met to determine franchisor’s services are substantially

performed?
a. The franchisor is not obligated in any way to refund cash already received or
forgive unpaid debt.
b. The initial services required of the franchisor by contract or otherwise have been
substantially performed.
c. No other material conditions or obligations exist.
d. All of the above.

5. On December 31, 2011, RR, Inc. authorized Fay to operate as a franchisee for an
initial franchisee of P75,000, of this amount, P30,000 was received upon signing
agreement, and the balance represented by a note is due three annual of P15,000 each
beginning December 31, 2012. The present value on December 31, 2011 of the three
annual payments appropriately discounted is P36,000. According to the agreement, the
non-refundable down payment represent a fair measure of the services already performed
by RR, however, substantial future services are required of RR. Collectibility of the
notes is reasonably certain. On December 31, 2011 RR should record unearned franchised
fees in respect of the Fay franchised of
a. P0 b. P36,000 c. P45,000 d. P75,000

6. On December 31, 2011, PP Inc. signed an agreement authorizing ZZ Company to operate as

a franchised for an initial franchised fees of P50,000. Of this month, 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. The agreement provide that the down
payment (representing a fair measure of the services already performed by PP) is not
refundable and no substantial future services are required to be performed. ZZ Company
credit rating is such that collection of the note is reasonably assured. The present
value at December 31, 2011 of three annual payments discounted at 14% (the implicit
rate for a loan of this type) is P23,220. On December 31, 2011, PP should record
unearned franchise fees of
a. P0 b. P23,220 c. P43,220 d. P30,000

7. Cherry Inc. charges on initials franchise fee of P115,000 with P25,000 paid when the
agreement is signed and the balance is five annual payments The present value of the
future payments, discounted at 10% is P68,234. The franchise has the option to
purchase P15,000 of equipment for P12,000. Cherry has substantially provided all
initial services required and collectability of the payments is reasonably assured.
The amount of revenue from franchise fees is:
a. P25,000 b. P90,234 c. P93,234 d. P115,000

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PRACTICAL ACCOUNTING 2 (SY. 2017 – 2018) - FRANCHISES

8. On June 30, 2011, Mr. Tuason entered into a franchise agreement with TM Company to
sell their products. The agreement provides for an initial franchise fee of
P1,250,000, payable as follows: P350,000 cash to be paid upon signing of the contract,
and the balance in five equal annual payments every December 31, starting December 31,
2011. Mr. Tuason signs 15% interest bearing note for the balance. The agreement
further provides that the franchisee must pay a continuing franchise fee equal to 5%
of its month gross sales. On October 30, the franchisor completed the initial services
required in the contract at a costs of P787,500 and incurred indirect costs of
P42,900. The franchise commenced business operations on November 2, 2011. The gross
sales reported to the franchisor are; November sales, P121,000 and December sales,
P147,500. The first installment payment was made in due date.

Assuming the collectability of the note is note reasonably assured, in the statement
of comprehensive income for the year ended December 31, 2011, how much is the net
income of TM Company?
a. P234,125 b. P301,625 c. P220,700 d. P200,825

9. On March 1, 2011, Mr. Solis signed a franchise agreement with CG Inc. CG charged an
initial franchise fee of P255,000 from Mr. Solis. When the agreement was signed, Mr.
Solis paid P95,000 and signed a non-interest bearing note for the balance. The note is
to be paid in four annual installment each beginning March 1, 2012. Mr. Solis normal
borrowing rate is 12%. The down payment is non-refundable. Collection of the note is
reasonably assured and the franchisor has performed substantially all of the services
required. Percent and future value factors are as follows:

Present value of P1 at 12% for 4 periods 0.6355

Future value of P1 at 12% for 4 periods 4.7793
Present value of an ordinary annuity of P1 at 12% for 4 periods 3.0374

How much revenue from the initial fee will be reported by CG Inc. On its December 31,
2011 statement of comprehensive income?
a. P255,000 b. P121,496 c. P216,496 d. P196,680

10. KC Fried Chicken Inc. granted a franchise to Manuel Villa. Manuel was to pay
P1,000,000 payable in five equal annual installments starting with the payment upon
signing of the franchise agreement. The franchisee was to pay monthly 5% of gross
sales of the preceding month. Should the operation of the outlet prove to be
unprofitable, the franchise may be cancelled with whatever obligation owing KC, in
connection with the P1,000,000 franchise fee, waived.

The first year of operations generated a gross sales of P500,000. For the first year,
KC Fried Chicken Inc. should report revenue from franchise fee of
a. P200,000 b. P1,025,000 c. P1,000,000 d. P225,000

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