AFAR
12 FRANCHISE ACCOUNTING
STRAIGHT PROBLEMS
The Gilas Corporation sells franchise licenses to operate
outlets for its restaurant business, Dyesebel. The initial
fee is not fixed for all agreements, as the total amount
depends upon which of the multi-deliverable items under
the contract will be subscribed to by the franchisee.
The initial fee shall be paid by a 37.5% cash down
payment, and the balance by a non-interest bearing note
payable in 5 annual periods, the first annual payment to
start 12 months after the contract signing. The initial fee is
refundable within 60 days upon receipt only. Aside from
the initial fee, the franchisee is required to pay a
continuing fee of 3% of its sales revenue as a sales-based
royalty, to be paid monthly.
In exchange, Gilas promises to perform the following
distinct obligations: to grant a franchise license valid for 10
years; to defray the cost of constructing the business
facilities; to deliver the necessary furniture and fixtures;
and to deliver two (2) complete sets of company
dinnerware. Of the contract obligations, only the
construction of facilities by Gilas maybe waived, in which
case, GILAS will have supervision over the construction
now to be done by the franchisee. The stand alone selling
price of this alternative performance obligation is
P300,000.
On January 2, 2019, Azkal Company signed a contract for
an initial fee of P8,750,000, paid a cash down-payment of
P3,281,250 and issued non-interest-bearing notes for the
MULTIPLE CHOICE
1. The nature of an entity’s promise in granting a
franchise license is a promise to provide a right to
access the entity’s trade name if which of the following
criteria is(are) met?
I. the contract requires, or the customer reasonably
expects, that the entity will undertake activities that
significantly affect the intellectual property to which
the customer has rights
II. the rights granted by the license directly expose the
customer to any positive or negative effects of the
entity’s activities
III. those activities do not result in the transfer of a
good or a service to the customer as those activities
occur.
a. I only c. II and III
b. I and II d. I, II and III
2. ABC Company awarded its franchise to XYZ Corp.. in
Cebu for a total fee of ₱100,000. Of said amount,
₱50,000 was payable upon the signing of the franchise
agreement and the balance, payable in two annual
payments of ₱25,000 each.
ABC had been very successful in Metro Manila with 100
franchisees, but Cebu was the first outside Metro
Manila. ABC’ 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
XYZ was
a. Cash ₱50,000
Notes receivable 50,000
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balance. It opted to have the construction of the facilities
done by Gilas. Azkal’s credit rating indicates that it can
borrow money at 20% interest for a loan of this type. The
present value of an annuity of 1 at 20% for 5 periods is
2.990.
The stand-alone-selling prices of the distinct performance
obligations are: P2,000,000 for the license; P3,000,000,
for the construction of facilities; P900,000 for the delivery
of furniture and fixtures; and P300,000 for the delivery of
the dinnerware.
The restaurant opened on October 1, 2019 and had sales
revenues of P350,000 during the remainder of the year.
By the end of 2019, all obligations of the franchisor had
been performed, except the delivery of the second set of
dinnerware.
Required:
(a) What is the journal entry recorded by Gilas on January
1, 2019?
(b) How much is total franchise revenue in 2019?
(c) How much is the combined revenue recognized by
Gilas from its constructing activities and dinnerware?
(d) How much is the recognized revenue for furniture and
fixtures?
(e) How much is interest revenue for 2019?
(f) Prepare compound journal entry for the recognition of
revenue for 2019?
Unearned franchise fee ₱100,000
b. Cash 50,000
Notes receivable 50,000
Revenue from franchise fee 50,000
Unearned franchise fee 50,000
c. Cash 50,000
Deposit liability 50,000
d. Cash 50,000
Notes receivable 50,000
Revenue from franchise fee 100,000
3. An entity enters into a contract with a customer and
promises to grant a franchise license that provides the
customer with a right to use the entity’s trade name
and sell the entity’s products for 10 years. In addition
to the license, the entity also promises to provide the
equipment necessary to operate a franchise store. In
exchange for granting the license, the entity receives a
sales-based royalty of 5% of the customer’s monthly
sale. The fixed consideration for the equipment is
P150,000 payable when the equipment is delivered.
The fixed consideration reflects the stand-alone selling
price of the equipment.
The entity, as franchisor, has developed a customary
business practice to undertake activities such as
analysing the customer’s changing preferences and
implementing product improvements, pricing
strategies, marketing campaigns and operational
efficiencies to support the franchise name.
Which of the following is incorrect:
a. The promise to grant the license and the promise
to transfer the equipment are distinct because the
customer can benefit from each promise together
with other resources that are readily available.
 b. There are three separate performance obligations:
the promises to grant a franchise license, to
provide the equipment and implied promise to
undertake activities to support the franchise name.
c. The implied promise to undertake activities to
support the franchise name is not a performance
obligation but rather a part of the entity’s promise
to grant a franchise license and in effect change
the intellectual property to which the customer has
rights.
d. The transaction price is the fixed consideration of
P150,000 and a variable consideration of 5% of
customer sales.
4. Which of the following is incorrect:
I. In allocating the transaction price the fixed
consideration of P150,000 will be allocated entirely
to the equipment since it reflects the stand-alone
selling price of the equipment.
II. The variable consideration of 5% will be recognized
as revenue when those sales occur.
a. Both statements are correct
b. Only Statement I is correct
c. Both statements are incorrect
d. Only Statement II is correct
5. On January 2, 2018, EXTREME COMPANY signed an
agreement to operate as a franchisee of BASIC
PRODUCTS, INC.. for an initial franchise fee of
P2,500,000 for 10 years. Of this amount, 40% was
paid when the agreement was signed and the balance
payable in four semi-annual payments beginning on
June 30, 2018. EXTREME signed a non-interest-bearing
note for the balance. EXTREME’s rating indicates that it
can borrow money at 24% on a loan of this type.
Assume that substantial services amounting to
P617,500 had already been rendered by BASIC
PRODUCTS, INC.
If the collection of the note is not reasonably assured,
the realized gross profit to be reported by BASIC for
the year ended December 31, 2018 is:
a. P1,057,076 c. P 880,856
b. P 855,225 d. 0
On December 31, 20x1 Mr. Eugene Krabs Co. enters into a
contract with Sheldon J. Plankton Co. to the right to use
Mr. Krab’s patented formula for a burger patty for a fixed
fee of P100,000 payable as follows:
• 20% is payable upon signing of the contract
• 80% is represented by a note receivable collectible in
4 equal annual instalments starting December 31,
20x2. The appropriate discount rate is 12%.
6. Plankton continues to operate using his own trade
name and has discretion of developing new product
name for the burger it will produce using the formula.
The license does not explicitly require Mr. Krabs to
undertake activities that will significantly alter the
intellectual property to which Plankton has rights.
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Neither does Plankton expects that Mr. Krabs will
undertake such activities.
Mr. Krabs transferred the formula to Plankton on
December 31, 20x1.
On December 31, 20x1 Mr. Krabs will record
a. a credit to revenue of P100,000.
b. a credit to revenue of P80,747.
c. a credit contract liability of P20,000.
d. a credit to contract liability of P80,747.
7. Using the same information in the preceding number,
except that the agreement requires Plankton to
discontinue using its trade name and instead use Mr.
Krabs trade name. Plankton is bound by the terms of
the contract to abide with Mr. Krabs policies on the use
of the formula but is given the right to any subsequent
modifications to the formula.
On December 31, 20x1 Mr. Krabs will record
a. a credit to revenue of P100,000.
b. a credit to revenue of P80,747.
c. a credit contract liability of P20,000.
d. a credit to contract liability of P80,747.
8. Using the same information in the preceding number,
and in addition, the contract requires Mr. Krabs to
undertake pre-opening activities of training Plankton in
operating the new business and assisting in the
recruitment and training of staff, and assisting in the
grand opening of the new business.
The P20,000 cash downpayment is non-refundable and
as at December 31, 20x1, represents a fair measure of
the pre-opening services already rendered.
On December 31, 20x1 Mr. Krabs will record.
a. a credit to revenue of P20,000.
b. a credit to revenue of P80,747.
c. a credit contract liability of P20,000.
d. a credit to contract liability of P80,747.
9. On January 2, 20x2, PATTER SERVICES signed an
agreement authorizing CUBICLE COMPANY to operate
as a franchisee over a 20-year period for an initial
franchise fee of P625,000 received when the
agreement was signed. CUBICLE commenced
operations on July 1, 20x2, at which date all of the
initial services required of PATTER SERVICES had been
performed. The agreement also provides that CUBICLE
must pay annually to PATTER SERVICES a continuing
franchise fee equal to 5% of the revenue from the
franchise. CUBICLE's franchise revenue for 20x2 was
P1,000,000.
For the year ended December 31, 20x2, how much
should PATTER SERVICES record as revenue from
franchise fees in respect of the CUBICLE franchise?
a. 65,625 c. 675,000
b. 625,000 d. 81,250