FRANCHISE IN ACCOUNTING

A franchise is a legal agreement under which a franchisee gains access to the

proprietary processes and trademark name of the franchisor, typically in
exchange for the payment of a periodic royalty fee.

ILLUSTRATIVE PROBLEMS

1. Butter Inc. franchises its name to different enterprise throughout the country.
The franchise agreement requires the franchisee to make an initial payment of
P80,000 on the agreement date and the balance, covered by a P160,000 non
interesting – bearing note, in four equal annual payments beginning one year
from the agreement date. The franchisor agrees to make market studies, find a
location, train the employees, and perform a few other minor related services.
The initial payment is refundable until the date of opening. The following
describe the relationship with a newly appointed franchisee (assume an interest
rate of 10%).

July 01: Entered into franchise agreement.

Aug. 15: Completed market study at cost of P25,000.

Nov. 10: Found suitable location; service cost, P10,000.

Jan. 10: Completed training of employees; cost, P35,000.

Jan. 15: Franchise outlet is opened.

Give the journal entries in 19-8 and 19-9 record the above transactions, including
any adjusting entry/entries at the 19-8 year-end.

July 01: Cash 80,000

Notes receivable 160,000

Discount on notes receivable 33,200

Deposit on franchise or Unearned

 Franchise Fees 206,800

P80,000 + (P40,000 x 3.17)

Aug. 15: Deferred franchise costs 25,000

Cash 25,000

Nov. 10: Deferred franchise costs 10,000

Cash 10,000

Dec. 31: Discount on notes receivable 6,340

Interest revenue (40,000 x 3.17) 6,340

Jan. 10: Deferred franchise costs 35,000

Cash 35,000

Jan. 15: Deposit on franchise 206,800

Franchise revenue 206,800

Franchise costs 70,000

Deferred franchise costs 70,000

July 1: Cash 40,000

Notes receivable 40,000

Dec. 31: Discount on notes receivable 11,314

Interest income 11,314