1. Dryers Inc. sell franchise for ice cream outlets in Metro Manila.

One contract has been signed on

January 5, 2013. The agreement calls for an initial franchise fee of P6,000,000 to be paid by the
franchisee at the signing of the contract. The franchisor’s initial cost of services is P2,250,000 to be
incurred uniformly over the six-month period prior to the scheduled opening date of July 15, 2013. No
future payments are to be made by the franchisee, although there will be continuing costs of P180,000
per year for services rendered during the ten year term of the contract. The normal return for the
franchisor on continuing operations involving franchise outlets is 10%.

How much net income would be recognized by Dryers, Inc. on July 15, 2013.

a. P3,750,000 b. P5,750,000 c. P6,000,000 d. P1,750,000

2. On August 31, 2013, KFC, Inc. entered into franchise agreements with two franchisees. The
agreements required an initial franchise fee payment of P700,000 plus four P300,000 payments due
every four months, the first payment is due on December 31, 2013. The market interest rate is 12%. The
initial deposit is refundable until substantial performance has been completed. The following data
describes each agreement:

What amount of net income is to be reported by KFC in 2013, assuming P1,000,000 was received from
each franchisee during the year.

Juan Jose Pedro Pablo

a. P1,088,970 P-0-
b. P1,788,970 P-0-
c. P1,132,529 P-0-
d. P1,132,529 P43,559

3. KFC Fried Chicken Inc., granted a franchise to Manuel Villa. Manuel was to pay P1,000,000 payable in
five equal annual instalments starting with the payment upon signing of the franchise agreement. The
franchisee was to pay monthly 5% of gross sales of the preceding month. Should the operating of the
outlet prove to be unprofitable, the franchise may be cancelled with whatever obligation owing KC, in
connection with the P1,000,000 franchise fee, waived. The first year of operations generated a gross
sales of P500,000. For the first year, KFC Fried Chicken, Inc., should report revenue from the franchise
fee of:
a. P200,000 b. P1,025,000 c. P1,000,000 d. P225,000

4. On June 30,2013 UCC, Inc. franchisor, entered into a franchise agreement with May Tuazon,
franchisee. The initial fee agreed upon is P1,100,000 of which P100,000 is payable upon signing of the
contract and the balance payables in four equal annual instalments. It was agreed that the down
payment is not refundable, not-withstanding lack of substantial performance of services by franchisor.
On July 1,2013 Miss Tuazon was able to start the operation.

When UCC, Inc. prepares its financial statements on December 31,2013, the unearned franchise fee to
be reported is:

a. P1,000,000 b. P1,000,000 c. P-0- d. P100,000

5. On January 2,2013, David, Inc. signed an agreement authorizing Jose Pidal to operate as a franchisee
for an initial franchise fee of P5,000,000. Of this amount, P2,000,000 was received upon signing of the
agreement and the balance evidence by a 12% promissory note which is due in three annual instalment
payments of P1,000,000 each beginning December 31,2013, Pidal started franchise operations on
September 1,2013, after David rendered the required initial services at a total cost of P500,000.
Although the first instalment was collected on due date, collection of the balance was not reasonably
assured.

What is the realized gross profit on franchise fee to be recognized by David at December 31,2013?
a. P2,700,000 b. P4,500 000 c. P3,000,000 d. P5,000,000