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Franchise & Consignment Problems
Franchise & Consignment Problems
Franchise & Consignment Problems
On January 1, 2020 HANZO CORP. entered into a franchise agreement with MOBA INC. to market their products. The
agreement provides for an initial fee of 12,500,000 payable as follows: 3,500,000 to be paid upon signing of the
contract and the balance in five annual payments every end of this year starting December 31, 2020. The agreement
further provides that the franchisee must pay a continuing franchise fee equal to 3% of the monthly gross sales. On
August 31, the franchiser completed the initial services required in the contract at a cost of 4,290,120 and incurred
indirect costs of 175,000.The franchisee commenced business operations on November 30, 2020. The franchiser was
1,800,000 on December 31, 2020. The first installment payment was made in dure date. (Round gross profit rate in
two decimal places).
a. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
the collectability of the note is reasonably assured. (The interest rate is 15%)
b. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
the collectability of the note is not reasonably assured. (The interest rate is 15%)
c. Assume that HANZO signed a non-interest-bearing note for the remaining balance of initial franchise fee
and the collectability of the note is reasonably assured. (The interest rate is 15%)
d. Assume that HANZO signed a non-interest-bearing note for the remaining balance of initial franchise fee
and the collectability of the note is not reasonably assured. (The interest rate is 15%)
e. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
did not substantially transferred control over the asset with a license period is 10 years.
(1) Compute for the total revenue for the year 2020;
(2) How much is the net income for the year ended, December 31, 2020?
SOLUTION
a. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
the collectability of the note is reasonably assured. (The interest rate is 15%)
b. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
the collectability of the note is not reasonably assured. (The interest rate is 15%)
c. Assume that HANZO signed a non-interest-bearing note for the remaining balance of initial franchise fee
and the collectability of the note is reasonably assured. (The interest rate is 15%)
d. Assume that HANZO signed a non-interest-bearing note for the remaining balance of initial franchise fee
and the collectability of the note is not reasonably assured. (The interest rate is 15%)
e. Assume that HANZO signed an interest-bearing note for the remaining balance of initial franchise fee and
did not substantially transferred control over the asset with a license period is 10 years.
Initial franchise fee (12,500,000 / 10) 1,250,000
Continuing franchise fee (1,800,000 * 3%) 54,000
Interest revenue (9,000,000 * 15%) 1,350,000
TOTAL REVENUE P 2,654,000
Direct costs (4,290,120 / 10) (429,012)
Indirect costs (175,000)
NET INCOME P 2,049,988
PROBLEM 2
On January 1, 2020, FANNT INC. granted a franchise to a certain franchisee. The franchise agreement provided for
the following terms:
• The franchisee is required to pay a non-refundable upfront fee in the amount of 500,000 and an on-going
royalty of 3% of the sales of the franchisee.
• In relation to the upfront fee, the franchise agreement required the entity to render the following
performance obligations:
The franchisee paid the upfront fee on January 1, 2020. The stand-alone prices of each performance obligations are
as follows:
The construction of the stall was completed on June 30, 2020. As of December 31, 2020, FANNY was able to deliver
6,000 units of raw materials to the franchisee and the franchisee reported sales amounting to 1,000,000. FANNY
determined that each performance obligations are separate and distinct from each other.
REQUIREMENT: What amount of revenue is to be recognized for each performance obligation for the year ended
December 31, 2020?
SOLUTION
FROZEN DELIGHT INC. charges an initial franchise fee of 75,000 for the right to operate as a franchisee of FROZEN
DELIGHT. Of this amount 25,000 is collected immediately. The remainder is collected in four equal annual
installments of 12,500 each. These installments have a present value of 41,402. As part of the total franchise fee.
FROZEN DELIGHT also provides training (with a fair value of 2,000) to help franchisees get the store ready to open.
The franchise agreement is signed on April 1, 20x5, training is completed, and the store opens on July 1, 20x5.
REQUIREMENT:
1. What is the amount of revenue from training and franchise on April 1, 20x5?
2. What is the amount of revenue from training and franchise on July 1, 20x5?
SOLUTION
1. What is the amount of revenue from training and franchise on April 1, 20x5? ZERO
Cash 25,000
2. What is the amount of revenue from training and franchise on July 1, 20x5? P 66,402
PROBLEM 4
December 1, 2022 KOTASABOYS grants a license to use patented technology over 5 years. The right to use the
technology has a contract price of 2,000,000 payable in full at contract inception. During December, they incurred
direct cost of 50,000 and indirect costs of 1/3 of the latter. The patent control was obtained by customer as early as
January of the following year but the customer insisted to use because of personal issues, and just decided to use it
on the project created three years thereafter.
REQUIREMENT:
SOLUTION
2022
Cash 2,000,000
Contract liability 2000000
2023
Contract liab 2000000
Revenue 2000000
Right to access
2023
Contract liability
(2000000/5 year) 1/12 33,333.33
Revenue 33,333.33
PROBLEM 5
Last January 2019, MINARCAUSEQOLANG agreed to transfer a license for 300,000 payable as: 70% of which should
be settled in 4 equal annual installments starting Dec 2019 with discount rate of 14% and the balance should be
paid as per signing of contract.
They incur contract costs totaling to 90,000 as the license provides right to use.
1. Compute for the amount allocated to the performance obligation(s) available
2. Compute for the profit of 2019
3. Compute for the profit for 2020
SOLUTION
: Transaction price is allocated to the sole performance obligation of granting the license
Rev 242970
Indirect cost
PROBLEM 6
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:
The present and future value tables at 4% for four (4) periods were as follows:
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?
SOLUTION
PROBLEM 7
On July 1,2013, Manuel Teng entered into a franchise agreement with Polo, Inc., to sell their products. The
agreement provides for an initial franchise fee of P1,250,000, payable as follows: P350,000 cash to be paid upon
signing of the contract, and the balance in five equal annual payments every December 31 starting December
31,2013. Manuel Teng signs 15% interest bearing note for the balance. The agreement further provides that the
franchisee must pay continuing franchise fee equal to 5% of its monthly gross sales. On October, the franchisor
completed the initial services required in the contract at a costs of P787,500 and incurred expenses of P42,900. The
franchisee commenced business operations on November2,2013. The gross sales reported to the franchisor are:
Assuming the collection of the note receivable is not reasonably assured, in its statement of comprehensive income
for the year ended December 31,2013, how much is the net income?
SOLUTION
Sch. 1:
Collections
Downpayment P350,000
1 st installment 180,000 P530,000
GPR (P462,500 ÷ P1,250,000) 37%
RGP P 196,100
(Consignment)
PROBLEM 8
On November 1, 2016, The Western Appliance Center ships five (5) of its appliances to the ABC Store on
consignment. Each Unit is to be sold at P25, 000 payable P5, 000 in the month of purchase and P1, 000 per month
thereafter. The consignee is to be entitled to 20% of all amounts collected on consignment sales. ABC Store sells
three (3) appliances in November and one (1) on December. Regular monthly collections are made by the consignee,
and appropriate cash remittances are made to the consignor at the end of each month. The cost of the appliances
shipped by the consignor was P15, 500 per unit. The consignor paid shipping cost to the consignee totaling P5, 000.
Requirement:
a. The cost of inventory on consignment on December 31, 2016 is:
b. Using the same information in no. 1, the profit on consignment for 2016 is:
Solution:
a. P16, 500
b. P14,000
PROBLEM 9
Solution:
b. 206,650
PROBLEM 10
General company consigned five computer equipments, with cost of P8,000 each, to the Xaviery Computers which
was to sell these goods for the account and risk of the former for a commission of 15% of selling price. The general
company paid trucking costs of P2,000 on the shipment. Correspondingly, Xaviery Computers paid P3,200 on the
freight of the shipment. On the last day of the year, Xaviery Computers reported that it sold three of the computers:
two for cash at P15,000 each and one on credit at P18,000 of which 25% was collected as down payment. Xaviery
computers remitted all the cash due.
Requirement:
a. The amount remitted by Xaviery computers is:
b. The Consignment net income (loss) is:
Solution:
a. P24,100
b. P13,680
34,320