Problem 1 (non-interest bearing note/ordinary annuity)

On May 31, 2020, Mister entered into a franchise agreement with Accounting,
Inc. to sell their products. The agreement provides for an initial franchise fee
of P1,200,000 which is payable as follows: P400,000 cash to be paid upon
signing of the contract, and the balance in five equal annual installments every
December 31, starting 2020.

Mister signs a non-interest bearing note for the balance. The credit rating of
the franchisee indicates that the money can be borrowed at 10%. The present
value factor of an ordinary annuity at 10% for 5 periods is 3.7908.

The agreement further provides that the franchisee must pay a continuing
franchise fee equal to 5% of its monthly gross sales. Accounting, Inc. incurred
direct cost of P540,000, of which P170,000 is related to continuing services
and indirect costs of P72,000, of which P18,000 is related to continuing
services.

The franchisee started business operations on September 2, 2020 and was

able to generate sales of P950,000 for 2020. The first installment payment
was made in due date.

Compute for the net income under the following scenarios:

Scenario 1: Collectability of the note is reasonably assured - 477409

Scenario 2: Collectability of the note is not reasonable assured - 172650
Scenario 3: Collectability of the note is uncertain – (4500)
Problem 2 (non-interest bearing note/ordinary annuity)

On January 2, 2020, Super signed an agreement to operate as a franchisee of

Hero, Inc. for an initial franchise fee of P10,000,000 for 10 years. Of this
amount, P2,000,000 was paid when the agreement was signed and the
balance payable in four annual payments beginning on December 30, 2020.
Super signed a non-interest bearing note for the balance.

Super’s rating indicates that he can borrow money at 8% for the loan of this
type. Present value of an annuity for 4 periods is 3.31.

A 2% continuing franchise fee is to be paid every end of the month. Assume

that substantial services amounting to P1,293,000 had already been rendered
by Hero, Inc. and that additional indirect franchise cost of P272,000 was also
incurred. Super generated a total of P1,500,000 sales for the year 2020.
Installment payment was made in due date.

 If the collection of the note is reasonably assured, what is the earned

franchise revenue for the year ended December 31, 2020? 8,650,000
 If the collection of the note is not reasonably assured, what is the
realized gross profit for the year ended, December 31, 2020? 2,949,840