FRANCHISE ACCOUNTING

Problem 1
On January 1, 2020, ABC Company entered into a franchise agreement with DEF
Company to market their products. The agreement provides for an initial fee of
P12,500,000 payable as follows: P3,500,000 to be paid upon signing of the contract and
the balance in five equal annual payments every end of the year starting December 31,
2020. ABC Company signs a non- interest bearing note for the balance. His credit rating
indicates that he can borrow money at 15% interest for a loan of this type. The present
value of an annuity of P1 at 15% for 5 periods is 3.352. 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 franchisor completed the initial services required in the contract
at a cost of P4,290,120 and incurred indirect cost of P175,000. The franchisee
commenced business operations on November 30, 2020. The gross sales reported to the
franchiser were P1,800,000 for December, 2020. The first installment payment was made
in due date.
1. Assume the collectibility of the note is not reasonably assured, how much is the
net income for the year ended, December 31, 2020?
2. Assume the collectibility of the note is reasonably certain, how much is the net
income for the year ended, December 31, 2020?
Problem 2
On July 1, 2020. ABC Company., a franchisor, entered into a contract with a franchisee
for the operation of a restaurant. The franchise agreement provides that the franchisee
shall pay a non- refundable upfront franchise fee amounting to P2,500,000 with P500,000
payable at the signing of contract and the balance payable in five equal semi-annual
instalments every December 31 and June 30. The franchisee issued a non-interest
bearing note with effective interest rate of 10%. The present value of the note receivable
is P1,731,791. The collection of the note receivable is unlikely. The franchise agreement
further provides for the payment of on-going royalties equivalent to 3% based on
franchisee's sales revenue.
During 2020, ABC Company has substantially performed the direct cost of services
required by the franchise in the amount of P1,785,433. In the same year, ABC Company
has also incurred indirect cost amounting to P10,000. For the years 2020 and 2021, the
franchisee has reported sales revenue amounting to P400,000 and P600,000,
respectively.

1. What is the net income to be reported by ABC Company for the year ended
December 31, 2020?
 2. What is the net income to be reported by ABC Company for the year ended
December 31,2021?

Problem 3
On January 1, 2021, a franchisor entered into a franchise agreement with a franchisee
which requires the latter to pay a non-refundable upfront fee of P800,000 at the signing
of the contract and on-going payment of royalty equal to 5% of the sales of the franchisee.
On the date of the signing of the contract, the franchisee paid the non-refundable upfront
fee. As part of the franchise agreement, the franchisor shall render the following
performance obligations which are considered separate and distinct from one another:
I. Training ten personnel of the franchisee with stand alone selling price of P100,000.
II. Construction of the franchisee's building and landscape with stand alone selling price
of P400,000.
III. Delivery of 1,000 units of raw materials to franchisee with stand alone selling price of
P300,000.
IV. Allowing the franchisee to use the franchisor's trademark and tradename for a term of
10 years starting from January 1, 2021 with stand alone selling price of P200,000.

As of the end December 31, 2021, the accounting department of franchisor obtained the
following information:
I. The franchisor was able to train seven out of ten personnel of the franchisee.
II. The percentage of completion of construction of the franchisee's building and
landscape was estimated by the engineer and architect at 90% although the
building was fully completed because the landscape was not yet started.
III. 600 units of raw materials were already delivered to the franchisee.
IV. For the year ended December 31, 2021, the franchisor reported sales revenue
amounting to P100,000 because it already started operation upon the
construction of the building on October 1.2021.

What is the total revenue to be reported by the franchisor for the year ended December
31, 2021
Problem 4
On January 1, 2023, ABC Company signed a franchise agreement to grant a license to
DEF for a term of 2 years commencing on the date of contract. The payment terms
indicated on the contract called for a non-refundable P207,000 down payment and a 10%
interest-bearing promissory note with face value of P138,000 and is payable in two equal
annual installments, with the first payment due on December 31, 2023.
What if the agreement granted DEF the right to use the intellectual property, how much
is the total revenue recognize by ABC Company?
What if the agreement granted DEF the right to access the intellectual property, how much
is the total revenue recognized by ABC Company?
Problem 5
January 1, 2023, ABC Company entered into a franchise agreement with DEF for an initial
franchise fee of P750,000 payable as follows: P250,000 down payment payable
immediately and two P250,000 annual payments evidenced by a non-interest bearing
note, with the first payment due on December 31, 2023. With an effective rate of 9%, the
present value of the note is P439,750.
The following excerpts were taken from the franchise contract:
• The franchise license is granted to DEF for a term of 5 years. DEF has the right to
any subsequent modification made by ABC Company to the franchise license. The
license has an observable stand-alone selling price of P319,875.
• ABC Company is to construct a food stall for DEF. The food stall is fully customized
for DEF, thus it has no alternative use for the franchisor. The food stall has no
observable stand-alone selling price but has an estimated cost of P85,300 and a
normal profit of 20% based on sales.
• ABC Company must conduct training for the employees of DEF.
It was determined that the three performance obligations were separate and distinct from
one another. By the end of the year, the food stall was 80% completed as to construction
and the training was 100% accomplished.
1. Assuming that the stand-alone selling price of the training of the employees was
highly variable, how much is the total revenue from franchise fees recognized by
the franchisor for the year ended December 31, 2023?

2. Assuming that the stand-alone selling price of the training of the employees
amounted to P639,750 based on the adjusted market assessment approach, how
much is the total revenue from franchise fees recognized by the franchisor for the
year ended December 31, 20232
Problem 6
On January 1, 2023, ABC Company entered into a franchising contract which granted
DEF a franchise license for an initial franchise fee of P5,175,000. The term of the
agreement will last for 4 years from the date of contract. DEF paid a non-refundable down
payment amounting to P1,035,000 and signed a non-interest bearing note for four annual
payments of P1,035,000, with the first installment due on December 31, 2023. With the
effective rate in the market of 16%, the present value of the note is computed as
P2,898,000. In addition, Luhan is to pay an annual sum to franchisor equivalent to 5% of
his net sales. Direct costs incurred by ABC Company to fulfill the contract amounted to
P1,552,500, while indirect costs totaled P100,000. Net sales of DEF amounted to
P2,000,000 for the year.
Assume that the agreement allowed DEF to obtain substantially all of the benefits from
the license at the point in time at which it was granted, how much is the franchisor's net
income for the year ended December 31, 2023?
Assume that the agreement provides that DEF is granted the right to obtain any benefits
from further modification made to the intellectual property of the franchisor, how much is
the franchisor's net income for the year ended December 31, 2023?