MODULE 3 – ASSESSMENT -Franchise Accounting (ACCSPEC)

Solve the following problems:

1. On January 1, 2020, ABC Co. enters into a franchise contract with a customer to grant the right to open a store in
a specified location. The store will bear ABC Co.’s trade name and the franchisee will have the right to sell ABC’s
products for 7 years, starting on the commencement of operations of the new store. The contract requires the
franchisee to pay a P1,400,000 non-refundable up-front fee (initial franchise fee). The franchise contract requires
ABC Co. to maintain the brand through product improvements, marketing campaigns, research and development,
and other activities that would strengthen the brand’s marketing position. The franchisee’s new store started
operations in July 1, 2020.

Required: Apply “Steps 2 to 5” of PFRS 15 to identify the following:

a. The performance obligation(s) in the contract. State how the performance obligation(s) are satisfied.
b. The transaction price.
c. Allocation of the transaction price.
d. The recognition of revenue from the contract.
e. Provide all the necessary journal entries in 2020.

2. Warren Co. charges an initial franchise fee of P1,840,000, with P400,000 paid when the agreement is signed and
the balance in five annual payments. The present value of the future payments, discounted at 10%, is P1,091,744.
The franchisee has the option to purchase P240,000 of equipment for P192,000. Warren has substantially
provided all initial services required and collectability of the payments is reasonably assured.

Question: What is the amount of revenue from franchise fees?

Items 3 to 9 are based on the following information:

Superlicious Burgers charges an initial fee of P70,000. Upon the signing of the agreement (which covers 3 years),
a payment of P28,000 is due. Thereafter, three annual payments of P14,000 are required. The credit rating of the
franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement signed on
May 1, 2020, and the franchise commences operation on July 1, 2020.

3. What is the amount of franchise revenue on May 1, 2020 assuming no future services are required by the
franchisor once the franchise starts operations?

4. What is the amount of franchise revenue on July 1, 2020?

5. Compute the amount of franchise revenue on May 1, 2020 assuming that the franchisor has substantial services
to perform, once the franchise begins operations, to maintain the value of the franchise.

6. Refer to #5, how much is the amount of franchise revenue on December 31, 2020?

7. What is the amount of franchise revenue on May 1, 2020 assuming that the total franchise fee includes training
services (with value of P2,400) for the period leading up to the franchise opening and for two (2) months following
the opening?

8. Refer to #7, what is the amount of franchise revenue on July1, 2020?

9. Refer to items #7 and #8, what is the amount of service revenue on September 1, 2020?

Due date: May 29

Note: No penalty on late submission for meritorious cases.