ACCO 30103

Franchise

Problem A (Source: Final exam AST 2020-2021)

On January 01, 2021, AshLloyd entered into a franchise contract with AshRald. The franchise agreement
required the franchisee, AshRald, to pay a nonrefundable upfront fee in the amount of P1,440,000 and on-
going payment of royalties equivalent to 5% of the sales of the franchisee. AshRald paid the non-refundable
upfront fee on March 01, 2021. In relation to the nonrefundable upfront fee, the franchise agreement required
AshLloyd to render the following performance obligations:
• To construct the franchisee’s stall with stand-alone selling price of P300,000.
• To supply cooking equipment and cash registers. Price of competitors for the similar items
(cooking equipment and cash registers) is valued at P240,000 while the forecast of the expected
cost of AshLloyd for the performance obligation is P200,000 plus an appropriate margin above
cost of 25%.
• To deliver 10,000 units of raw materials to AshRald with stand-alone selling price of P460,000.
• To allow AshRald to use the entity’s tradename for a period of 10 years starting on the inception
of the contract with stand-alone selling price of P600,000.

During the year 2021, AshLloyd satisfied its performance obligations to supply cooking equipment and
install cash registers, constructed the franchisee’s stall and was able to deliver 6,000 units of raw
materials to AshRald. For the year ended December 31, 2021, the franchisee reported sales revenue
amounting to P720,000. The entity had determined that the performance obligations are separate and
distinct from one another and accounted under PFRS 15.

1. What is the amount of the nonrefundable upfront fee to be allocated to the supply of cooking
equipment and cash registers?
a. P216,000 b. P230,400 c. P144,000 d. None of the above

2. How much total revenue shall be recognized by AshLloyd for the year ended December 31, 2021?
a. P793,800 b. P829,800 c. P779,400 d. P815,400

Problem B (Source: Final exam AST 2020-2021)

On May 31, 2020, Win grants Bright the right to operate as a franchisee of "2gether Spa" for a
nonrefundable upfront fee of P2,400,000 and 3% royalty fee based on Bright's annual sales. Win in
return will (1) assist Bright in locating the site, (2) provide supplies and equipment, and (3) allow Bright
to use the tradename for 10 years. Bright's income for the year totaled P1,000,000. Win has no
performance obligation (PO) remaining as of year-end and was able to recognize income of P28,000
from PO#3. Win determined that each PO is separate and distinct from one another and follows PFRS
15 accordingly.

3. How much is the stand-alone selling price of PO#3 if total stand-alone selling price of the three-
performance obligation is P3,000,000?
a. P60,000 b. P48,000 c. P600,000 d. P480,000

4. how much is the total revenue recognized by Win for the year ended 2020?
a. P2,400,000 b. P2,430,000 c. P1,978,000 d. P1,948,000
Problem C
Erap’s Grill franchises its name to different people in Metro Manila. The four (4) year franchise agreement
requires the franchisee to make an initial payment of P240,000 and sign a P640,000, non-interest-bearing
note on the agreement date. The note is to be paid in annual payments of P160,000, each beginning one
year from the agreement date. Current interest rate is 12%. The franchisor agrees to make market
studies, find a location, train the employees, and perform a few other relatively minor services. The
following transactions describe the relationship with Mr. Villanueva, a franchisee:
2022
July 1 Entered into a franchise agreement.
Sept. 1 Completed a market study at a cost of P120,000.
Nov. 15 Found suitable location. Service cost, P50,000.
2023
Jan. 10 Completed training program for employees, cost P150,000.
Feb. 1 Franchise outlet opened and commenced operations.
July 1 Received first annual payment.

Required: Journalize all transactions including adjustments from 2022-2023.