FRANCHISE ACCOUNTING

MULTIPLE CHOICE PROBLEMS

1. On December 31, 2014, JKL, a franchisor, entered into a franchising

agreement with GMD charging GMD a franchise fee of P 400,000. Upon
signing of the contract, a down payment of P 100,000 is paid with the balance
payable in four equal annual installment starting 2015. JKL had already
performed 99.9% of the services as of February 1, 2015 at a total cost of P
140,000. JKL was able to collect the first installment payment in 2015 but the
collectibility of the remaining balance is still doubtful. Calculate the profit to
be recognized by JKL in its 2015 income statement.
A. P 260,000 B. P 48,750 C. P 65,000 D. P 113,750

2. On January 1, 2012, Mr. DJ entered into a franchise agreement with GB to

market their products. The agreement provides for an initial fee of P 12.5M
payable as follows: P 3,500,000 to be paid upon signing of the contract and
the balance in five equal annual payments every end of the year starting
December 31, 2012. Mr. DJ signs a non-interest bearing note for the balance.
His credit rating indicates that he can borrow money at 15% interest for a loan
of this type. The present value of an annuity of 1 at 15% for 5 periods is
3.352. The agreement further provides that the franchisee must pay a
continuing franchise fee equal to 3% of the monthly gross sales. On August
31, the franchisor completed the initial services required in the contract at a
cost of P 4,290,120 and incurred indirect costs of P 175,000. The franchise
outlet commenced business operations on November 30, 2012. The gross sales
reported to the franchisor were P 1,800,000 for December 2012. The first
installment payment was made in due date, but further collection of the
balance was not reasonably assured. Calculate the net income for 2012 that
the franchisor will report in its income statement.
A. P 3,126,268 B. P 3,201,268 C. P 2,417,268
D. P 3,072,268
3. ABC, Inc., franchisor, entered into a franchise agreement with DEF, Inc. on
July 1, 2012. The initial franchise fee agreed upon is P 330,000, of which P
30,000 is payable upon signing and the balance covered by a non-interest
bearing note payable in four equal annual installments. It was agreed that the
down payment is not refundable, notwithstanding lack of substantial
performance of services by franchisor. The direct franchise cost incurred was
P 195,000. Indirect franchise expense of P 18,750 was also incurred. The
management of DEF estimated that they can borrow at the rate of 12%. The
franchise outlet commenced operations on July 31, 2012. Calculate the net
income to be reported by ABC on July 31, 2012 if interim financial
statements are prepared at that date. (Use two decimal places for the present
value factor).
A. P 44,250 B. P 71,610 C. P 46,530 D. P 65,280

4. On July 1, 2012, Mr. Ryan entered into a franchise agreement with Don Roy
to sell their products. The agreement provides an initial franchise fee of P
1,250,000, payable as follows: P 350,000 cash to be paid upon signing of the
contract, and the balance in five equal annual payments every December 31,
starting December 31, 2012. Mr. Ryan signs 15% interest bearing note for
the balance. The agreement further provides that the franchise must pay a
continuing franchise fee equal to 5% of its monthly gross sales. On October
29, the franchisor completed the initial services required in the contract at a
cost of P 787,500, and incurred indirect cost of P 42,900. The franchise
commenced business operations on November 2, 2012. The gross sales
reported to the franchisor are November sales, P 121,000 and December
sales, P 147,500. The first installment payment was made on due date.
Assuming the collectibility of the note is not reasonably assured, in its
income statement for the year ended December 31, 2012, how much is the
net income?

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 A. P 234,125 B. P 301,625 C. P 220,700 D. P 200,825

5. On July 1, 2013, Hot Company signed an agreement to operate as a

Franchisee of Dryer’s Ice Cream Company for an initial franchise fee of P
10,000,000. On the same date, Hot Company paid P 6,000,000 and agreed to
pay the balance evidence by a non-interest bearing note in four annual
payments of P 1,000,000, beginning July 1, 2014. The collectibility of the
note is not reasonably assured. Hot Company can borrow at 14% for a loan of
this type. The present value of an annuity of 1 at 14% for 4 periods is P 2.91.
Dryer’s Company rendered initial services so that Hot Company can start their
operations. The total cost of such services is P 2,000,000. The franchisor also
incurred indirect costs of P 50,000. The franchise agreement further requires
the franchisee to pay continuing franchise fee at 5% of its monthly gross sales.
The total sales reported by Hot Company up to December 31, 2013 is P
5,000,000. Assuming the use of the installment method of revenue
recognition, what is the net income of Dryer’s Ice Cream Company for the
year ended December 31, 2013?
A. P 4,630,000 B. P 5,056,700 C. P 4,880,000
D. P 4,833,700

6. On January 2, 2011, UC Inc. authorized SWU to operate as a franchisee initial

franchise fee of P 750,000. Of this amount, P 300,000 was received as down
payment upon signing the agreement, and the balance represented by a 12%
note due in three annual payments, beginning December 31, 2011. UC
rendered the required initial services at a cost of P 150,000 and SWU was able
to operate the franchise on April 27, 2011. Assuming the collection of the

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 note is not reasonably assured, the realized revenue from the initial
franchise on December 31, 2011 is
A. P 360,000 B. P 650,000 C. P 300,000 D. 450,000

7. On June 1, 2012, The Gardens, franchisor, receives P 1,000,000 from Marco

de Santos representing down payment on the franchise agreement signed that
day. Marco gave The Gardens a 12% interest bearing promissory note for the
balance of P 8,000,000 payable in four semi-annual installments. Franchise
services were substantially completed by The Gardens on November 15, 2012
at a cost of P 2,000,000. On December 1, 2012, the first semi-annual
installment became due and was accordingly paid by Marco. The Gardens
appropriately uses the accrual method of recording franchise revenue. In its
December 31, 2012 financial statements, how much will The Gardens report
as Unearned franchise revenue?
A. P -0- B. P 6,000,000 C. P 8,000,000
D. P 9,000,000

8. SSR Restaurant, sold a fast-food restaurant franchise to Shari. The sale

agreement, signed on January 2, 2014, called for a P 30,000 downpayment
plus two P 10,000 annual payments representing the value of initial franchise
services rendered by SSR Restaurant. In addition, the agreement requires the
franchisee to pay 5% of its gross revenues to the franchisor; this was deemed
sufficient to cover the cost and provide a reasonable margin on continuing
franchise services to be performed by SSR Restaurant. The restaurant opened
early in 2014, and its sales for the year amounted to P 500,000. Assuming a
10% interest rate is appropriate, SSR Restaurant’s 2014 total revenue will
be:
A. P 30,000 B. P 47,355 C. P 72,355 D. P 74,090

9. At the beginning of the year, RVM got the Fredo’s a known steak house of
upscale patronage. The franchise agreement required a P 500,000 franchise
fee payable P 100,000 upon signing of the franchise and the balance in four

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annual installments starting the end of the current year. At the present value
using 12% as discount rate, the four installments would be approximate P
199,650. The fees once paid are not refundable. The franchise may be
cancelled subject to the provision of the agreement. Should there be unpaid
franchise fee attributed to the balance of the main fee (P 500,000), same
would become due and demandable upon collection. Further, the franchisor is
entitled of a 5% fee on gross sales payable monthly within the first 10 days of
the following month. The credit investigation bureau rated RVM AAA credit
rating. The balance of the franchise fee was guaranteed by a commercial bank,
the first year of operation yielded gross sales of 9 million. Fredo’s earned
from RVM for the first year of operations amounted to:
A. P 550,000 B. P 650,000 C. P 749,650 D. P 950,000

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