Name:

Section:

Summary of Answers:
1. 6. 11.
2. 7. 12.
3. 8. 13.
4. 9. 14.
5. 10. 15.

License
Use the following to answer questions 1 – 2:
The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license
arrangement, Tank-Skin pays the UFL a P1 million initial license fee plus a bonus when annual sales of
Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.

1. How much of the P1 million initial license fee should the UFL recognize as revenue in the first year
of the contract?

2. Refer to the information in the previous question. Assume that the UFL anticipates that, in addition
to receiving the P1 million license fee, it will receive a bonus of P2 million in year 1 of the contract
and a bonus of P3 million in years 2-4 of the contract based on Tank-Skin’s sales. Also assume that
the UFL is convinced that it is probable there will not be a significant reversal of any revenue
recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is
the amount of transaction price that the UFL would estimate with respect to this license arrangement?

Use the following to answer questions 3 – 5:

Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software packages
sells for P150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells
for P3,000 and contains Smith & Sons’ archive of accounting standards and articles, which Smith & Sons
updates on a weekly basis and downloads to archive users for the two years following purchase of the
product.

The customer purchases both software packages on June 1, 20x6.

3. Is the software license for tutorials is a right of use or right of access?

4. Is the archive of accounting standards and articles is a right of use or right of access?

5. How much revenue should Smith & Sons recognize for the year?

Franchise
Use the following information for questions 9 and 10:
Emu and You, a new fast food chain, sells exclusive franchises for P25,000 initial franchise fee. For this
fee, franchisees receive training, assistance on site selection, assistance during the construction phase, and
promotional considerations for the grand opening, including a visit by Ernie Emu. There is also a P500
per month continuation fee for institutional advertising and accounting services after the store is open for
business. On March 20 of the current year, Emu and You sold a franchise to I.M. Stuck for the standard
fee. The franchisor received a 20% down payment and a 10%, four-year note for the balance. On June 15,
Stuck had his grand opening and Emu and You had met all requirements for performance obligations for
the initial franchise fee. On July 15, Emu and You received P500 for the continuing fee.

6. On March 20, franchise revenue amounted to:

7. On June 15, franchise revenue amounted to:
8. On July 15, franchise revenue amounted to:

Use the following information for questions 9 to 11:

The Racquet Store (RS) sells franchise agreements in which they charge an up-front/initial fee of P50,000
for assistance in setting-up/opening a store, and then a monthly fee of P1,000 for national advertising and
administrative assistance. Steffi Hingis signs a franchise agreement with RS.

9. Assume that Steffi paid the P50,000 in cash when she signed the agreement. RS can recognize
revenue associated with the P50,000:
a. when Steffi signs the agreement and pays the cash.
b. as soon as they have assisted Steffi in setting-up/opening the store
c. gradually as they provide advertising and administration services
d. none of these
10. Assume that Steffi signed a P50,000 installment note when she signed the franchise agreement. RS
can recognize revenue associated with the P50,000:
a. when Steffi signs the agreement, so long as RS has sufficient experience with similar
arrangements to estimate uncollectible accounts
b. as soon as they have assisted Steffi in setting-up/opening the store, so long as RS has
sufficient experience with similar arrangements to estimate uncollectible accounts
c. Gradually as they provide advertising and administration services
d. When they receive installment payments from Steffi, so long as RS has sufficient experience
with similar arrangements to estimate uncollectible accounts.

11. Assume that Steffi signed a P50,000 installment note when she signed the franchise agreement. RS
has no experience estimating uncollectible accounts associated with these sorts of notes. They can
recognize:
a. P50,000 of revenue when Steffi signs the agreement
b. P50,000 of revenue as soon as they have assisted Steffi in setting-up/opening the store
c. revenue under the installment method, starting when Steffi signs the agreement
d. revenue under the installment method, as soon as they have assisted Steffi in setting up the
store.

Under the old standard, substantial performance has occurred but cannot estimate bad debts, so
use the installment sales method. But, under IFRS 15 installment sales method in not anymore
applicable, revenue recognize depending on the performance obligation.

Non-refundable Upfront Fee

Items 12 and 13 are based on the following information:
Emil Morales signs a 1-year contract with Fitness The First Gym. The terms of the contract are that Emil
Morales is required to pay a non-refundable initiation fee of P12,000 and an annual membership fee of
P1,000 per month. Fitness The First Gym determines that its customers, on average, renew their annual
membership two times before terminating their membership.
12. How many performance obligations?
a. None c. Two
b. One d. Three
13. How much is the annual revenue?
 a. P 6,000 c. P16,000
b. P12,000 d. P48,000

14. All revenue for franchise companies is derived from

a. assistance for site selection and negotiating lease.
b. bookkeeping and advisory services.
c. sale of initial franchise and continuing fees.
d. advertising and promotion.

15. Franchise fees should be recognized

a. on the date the contract was signed.
b. on the date the franchise is opened for business.
c. on the date the franchise fee is paid to franchisor.
d. when performance obligations are satisfied.