PRACTICE SET # 6: FRANCHISE ACCOUNTING

PROBLEM #1

LISAYAH Company operates and franchises coffee shops around the world. On January 1,
2021, it entered into a franchise agreement with a franchisee. As part of its franchise
agreement, it requires a franchisee to pay an initial franchise fee in the amount of
P1,000,000, of which P500,000 is payable at the date of perfection of contract and the
balance payable in five annual installments every December 31.

The franchisee issued a non-interest-bearing note with effective interest rate of 10%
for the balance of the initial franchise fee and the present value of the note is
P758,157.

The franchise agreement also provides for ongoing payment of royalties of 5% based on
sales revenue of franchisee. As part of the franchise agreement, the company provides
pre-opening services, including supply and installation of coffee equipment and cash
registers with a total cost of P754,894.

The company evaluates and determines that the contract with the customer is a single
performance obligation that need not be separated. As of July 1, 2021, it already
satisfied its performance obligation to supply and install coffee equipment and cash
registers to the franchisee.

For the year ended December 31, 2021, the franchisee reported sales revenue in the
amount of P1,000,000.

Question 1:
What is the net income to be reported by the company for the year ended December 31,
2021, if the collection of the note receivable is reasonably assured?

Question 2:
What is the net income to be reported by the company for the year ended December 31,
2021, if the collection of the note receivable is not reasonably assured?

PROBLEM #2

On January 2, 2021, YG Company signed an agreement to operate as a franchisee of BLACKPINK

for an initial franchise fee of P2,250,000 for 10 years. Of this amount, P420,000 was
paid when the agreement was signed and the balance payable in four annual payments
beginning on December 31, 2021. The company issued a promissory note for the balance,
the relevant interest rate being 24%. Assume that substantial services amounting to
P333,960 had already been rendered by BLACKPINK and that additional indirect franchise
cost of P56,400 was also incurred.

The franchisee started operations during 2021 with a total sales of P360,000. The
agreement further provides that the franchisee must pay a continuing franchise fee equal
to 3% of its gross sales. If needed, the PV factor is 2.40.

Question 1:
Assuming the note is non-interest-bearing and its collection is reasonably assured,
calculate the net income reported by BLACKPINK on the franchise for the year ended
December 31, 2021.

Question 2:
Assuming the note is interest-bearing and its collectibility is doubtful, determine the
realized gross profit on the initial franchise fee for the year ended December 31,
2021.
PROBLEM #3

JENDEUKIE, Inc. charges an initial franchise fee of P90,000 broken down as follows:

Rights to trade name, market area, and proprietary know- how P40,000
Training services 11,500
Equipment (cost of P

Upon signing of the agreement, a payment of P40,000 is due. Thereafter, two annual
payments of P30,000 are required. The credit rating of the franchisee is such that it
would have to pay interest of 8% to borrow money.

The franchise agreement is signed on August 1, 2021, and the franchise commences operation
on November 1, 2021. Assume that the total training fees includes training services for
the period leading up to the franchise opening (P5,000 value) and for 3 months following
opening.

The journal entry on August 1, 2021 would be?

PROBLEM #4

At the beginning of the year, ROSEANNE Company got the franchise of BLACKPINK, a known
steak house of upscale patronage. The franchise agreement required a franchise fee payable
upon signing of the franchise and the balance in four annual installments starting the
end of the current year. At present value using 12% as discount rate, the four
installments would approximate P3,037,350. The fees once paid are not refundable.

The franchise may be canceled subject to the provisions of the agreement. Should there
be unpaid franchise fee attributed to the balance of main fee (P5,000,000), the same
would become due and demandable upon cancellation. Further, the franchiser is entitled
to 5% fee on gross sales payable monthly within the first ten days of the following
month. The Credit Investigation Bureau rated the company as 1 + credit rating. The balance
of the franchise fee was guaranteed by a commercial bank.

The first year of operations yielded gross sales of P90 million, BLACKPINK's earned
franchise fees from the company for the first year of operation, amounted?

PROBLEM #5

JICHU Inc. Franchisor entered into a franchise agreement with SOMI, franchisee, on
March 31, 2021.

The total franchise fee is P500,000, of which P100,000 is payable upon signing and the
balance in four equal annual installments. The down payment is refundable in the event
the franchisor fails to render services and none thus far had been rendered. When SOMI's
prepares its financial statements on March 31, 2021, the franchise fee revenue to be
reported is?