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Chapter 8
Accounting for Franchise Operations - Franchisor
NAME: Date:
Professor: Section: Score:

QUIZ 1:

1. You are an accountant. Your client, a franchisor, asked you for an advice regarding the
recognition of revenue from a franchise contract. Your advice to your client would most
certainly be based on which of the following standards?
a. FAS No. 45 (US GAAP)
b. PFRS 15
c. PAS 15
d. PFRS 18

2. The consideration received from a contract with a customer that does not meet the criteria under
‘Step 1’ of PFRS 15 is
a. recognized as liability.
b. recorded through memo entry only.
c. disclosed only.
d. b and c

3. Entity A enters into a franchise contract with Customer X. The agreement provides Customer X
the right to access Entity A’s intellectual property. How should Entity A recognize revenue from
the franchise agreement?
a. over time, as Customer X receives and consumes the benefit from Entity A’s performance of
providing access to its intellectual property.
b. at a point in time when Entity A transfers control over the promised license to Customer X.
c. a or b as a matter of an accounting policy choice
d. when there is “substantial performance” by Entity A in accordance with US GAAP.

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:
4. 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
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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:
5. 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

CASELET 2

Turnover Café sold a coffee shop franchise to Strike. The sale agreement, signed on March 2020
called for 350,000 down payment plus two 175,000 annual payments representing the value of initial
franchise services rendered by Turnover. In addition, the agreement required the franchise to pay
8% of its gross sales to the franchisor. The coffee shop opened on October 2020 and its sales for the
quarter ending is 2,625,000. Assuming the 12% interest is the rate appropriate (use 4 decimal places
for PV factor), how much is Turnover’s total revenue for the year?