Franchises (Problem 2)

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 of
1 for 4 periods at 8% is 3.31.

A 2% continuing franchise fee is to be paud every end of the month. Assume that substantial services amounting
to P1,293,000 has 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.

1. If the collection of the note is reasonably assured, what is the earned franchise revenue for the year
ended December 31, 2020?
2. If the collection of the note is not reasonably assured, what is the realized gross profit for the year ended,
December 31, 2020?