Franchises (Problem 1)

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 the 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 of an ordinary annuity at 10% for 5 periods is 3.7908.

The agreement further provides that the franchisee must pay a continuing franchising fee equal to 5% of its
monthly gross sales. Accounting, Inc. incurred a 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 franchise started business operations on September 2, 2020 and was able to generate sales of P950,000
for 2020. The first installment payment was made on due date .

Compute for the net income under the following scenarios:

Scenario 1: Collectibility of the note is reasonably assured
Scenario 2: Collectibility of the note is not reasonably assured
Scenario 3: Collectibility of the note is uncertain