Franchise Agreement | Franchisor

Assessment Task

Instruction: Prepare a 2-column table. In the first column, indicate your answer; in the second column,
write down your justification and, if appropriate, the solution supporting your answer.

To check your preliminary score, you need to encode your final answer in the google form provided.

1. An entity enters into a contract with a customer and promises to grant a franchise license that
provides the customer with the right to use the entity’s trade name and sell the entity’s product for
ten years. The entity also promises to provide the equipment necessary to operate a franchise
outlet. In exchange for granting the license, the entity receives a sales-based royalty of 5% of the
customer’s monthly sales. What is/are the performance obligation/s to be identified by the
franchisor?
a. Franchise license only
b. Equipment license only
c. Franchise license and equipment
d. Right to use the entity’s trade name and sell the entity’s product
2. Types of franchising arrangements include all of the following, except
a. Service sponsor – retailer
b. Wholesaler – service sponsor.
c. Manufacturer – wholesaler
d. Wholesaler – retailer
3. IFRS 15, Revenue from Contracts with Customers, identifies these sources of franchise revenue.
a. Advertising and promotion
b. Site selection assistance and training
c. Bookkeeping and advisory services
d. Initial franchise fee and continuing franchise fee
4. Portion of the initial franchise fee may be allocated to
a. Continuing franchise fee.
b. Bargain purchase option as adjustment of the selling price.
c. Option to purchase the franchisee’s business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
5. Continuing franchise fees should be recorded by the franchisor
a. As revenue when earned and receivable from the franchisee.
b. As revenue when received.
c. In accordance with the accounting procedures specified in the franchise agreement.
d. As revenue only after the balance of the initial franchise fee has been collected.
6. In accordance with IFRS 15, Revenue from Contracts with Customers, franchise revenue should
be recognized
a. On the date the contract was signed.
b. On the date the operation commenced.
c. On the date, the franchise fee is paid to the franchisor.
d. When performance obligations are satisfied.
7. Occasionally, a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should
 a. Increase revenue recognized from the initial franchise fee by the amount of the expected
future purchases.
b. Record a portion of the initial franchise fee as unearned revenue, which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. Defer recognition of any revenue from the initial franchise fee until the bargain purchases
are made.
d. None of these.
8. A franchise agreement grants the franchisor an option to purchase the franchisee’s business. It is
probable that the option will be exercised. When recording the initial franchise fee, the franchisor
should
a. Record the entire initial franchise fee as a deferred credit, which will reduce the
franchisor’s investment in the purchase outlet when the option is exercised.
b. Record the entire initial franchise fee as unearned revenue, which will reduce the amount
of cash paid when the option is exercised.
c. Record the option of the initial franchise fee, which is attributable to the bargain purchase
option, as a reduction of the future amount recoverable from the franchisee.
d. None of these.

On January 1, 2022, Entity A granted a franchise right to franchisee for the operation of selling automobile
parts. Entity A also granted the franchisee the right to access its trade name for a period of 10 years. The
franchisee is required to pay an upfront non-refundable initial franchise fee of P20,000,000 and a
continuing franchise fee of 10% of the annual sales. It is the obligation of Entity A to construct the
franchise stall and to deliver 10,000 units of automobile parts to the franchisee.

Stand-alone selling prices

Trade-name P4,000,000
Construction of the stall P3,000,000
Delivery of 10,000 units of automobile parts Not directly observable

After careful evaluation of the market, the price that a customer is willing to pay for the delivery of 10,000
units of materials was P1,000,000 under the adjusted market assessment approach.

On October 1, 2022, Entity already finished the construction of the stall and as of December 31, 2022,
Entity A only delivered 2,000 units of automobile parts. The franchisee reported sales revenue on
December 31, 2022, in the amount of P4,000,000.

1. Under IFRS 15, what is the revenue recognized pertaining to the delivery of automobile parts?
a. 2,500,000
b. 312,500
c. 0
d. 500,000
2. Under IFRS 15, what is the total revenue from the initial franchise fee?
a. 9,000,000
b. 9,400,000
c. 11,000,000
d. 11,400,000
Refer to the previous problem except that the stand-alone selling prices are
Trade-name Not directly observable
Construction of the stall Not directly observable
Delivery of 10,000 units of automobile parts P4,000,000

The stall had an estimated cost of P4,000,000 with a margin of P6,000,000. Since it is the first time Entity
A to granted access to its trade name, Entity A has not yet established a price for that service.

On October 1, 2022, Entity already finished the construction of the stall and as of December 31, 2022,
Entity A only delivered 3,500 units of automobile parts. The franchisee reported sales revenue on
December 31, 2022, in the amount of P1,500,000.

3. Under IFRS 15, what is the amount of transaction price allocated to the performance obligation
trade name?
a. 6,000,000
b. 10,000,000
c. 12,000,000
d. 0
4. Under IFRS 15, what is the total revenue from the initial franchise fee for the year-end December
31, 2022?
a. 12,150,000
b. 14,800,000
c. 12,000,000
d. 1,400,000
5. Under IFRS 15, what is the total revenue for the year-end December 31, 2022?
a. 12,150,000
b. 14,950,000
c. 12,000,000
d. 1,550,000

On January 1, 2022, an entity granted a franchise agreement to a franchisee. The contract provided that
the franchisee shall pay an initial franchise fee of P500,000 and ongoing payment of royalties equivalent
to 8% of the sales of the franchisee. On January 1, 2022, the franchisee paid a down payment of
P200,000 and issued a 3-year 12% interest-bearing note for the balance payable in three equal annual
installments starting December 31, 2022.

On June 30, 2022, the entity completed the performance obligation of the franchise at the cost of
P300,000. Aside from that, the entity incurred an indirect cost of P25,000. The franchisee started
operation on July 1, 2022, and reported sales revenue amounting to P50,000 for the year ended
December 31, 2022.

6. Under IFRS 15, what is the net income for the year-end of December 31, 2022?
a. 239,000
b. 203,000
c. 215,000
d. 179,000

On January 1, 2022, Franchisee entered into a franchise agreement with Franchisor to market their
products. The agreement provides for an initial fee of P2,500,000 payable as follows: P700,000 to be paid
upon signing of the contract and the balance in 5 equal annual payments every end of the year starting
December 31, 2022. The franchisee 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 five 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 the cost of P858,024 and incurred indirect cost of
P35,000.

The Franchisee commenced business operations on November 30, 2022. The gross sales reported to the
Franchisor were P360,000 for December 2022.

7. Assume the collectibility of the note is reasonably assured, what is the net income for the year
ended December 31, 2022?
a. 843,488
b. 1,024,496
c. 1,205,504
d. 1,240,504
8. Assuming the collectibility of the note is not reasonably assured, what is the net income for the
year ending December 31, 2022?
a. 640,254
b. 278,238
c. 459,246
d. 675,254

An entity enters into a contract with a customer and promises to grant a franchise license that provides
the customer with the right to use the entity’s trade name and sell the entity’s product for ten years. The
entity also promises to provide the equipment necessary to operate a franchise outlet. In exchange for
granting the license, the entity receives a sales-based royalty of 5% of the customer’s monthly sales.
Assume the fixed consideration for the equipment is ₱1,500,000 payable when the equipment is delivered
and the customer’s sales for the month is ₱40,000,000.

9. How would the transaction price be allocated to performance obligation/s?

a. Equipment ₱1.5m, Franchise license ₱4m
b. Equipment ₱1.5m, Franchise license ₱200,000
c. Franchise license ₱1.7m
d. Franchise license ₱200,000

Hungry Jacks Inc. granted a franchise rights to Burger Machine for an initial franchise fee of ₱1,800,000,
with ₱520,000 paid when the agreement is signed on January 1, 2020. The balance shall be paid in four
annual installments with a present value of ₱1,014,000 discounted at 10%. The franchise agreement
stipulates that the franchisee has the right to purchase ₱80,000 worth of kitchen equipment and supplies
for ₱60,000. Portion of the initial franchise fee is designated for advertising to be provided by Hungry
Jacks for the next five years in the amount of ₱1,500 per month. Collectibility of the payments is
reasonably assured and the franchisor has performed all the initial services required on time.

10. What is the journal entry to recognize revenue from franchise fee when the agreement is signed?
a. Cash ₱520,000
 Notes receivable ₱1,280,000
Unearned franchise fee ₱356,000
Revenue from franchise fee ₱1,444,000
b. Cash ₱520,000
Notes receivable ₱1,280,000
Unearned interest income ₱266,000
Unearned franchise fee ₱110,000
Revenue from franchise fee ₱1,424,000
c. Cash ₱520,000
Notes receivable ₱1,280,000
Revenue from franchise fee ₱1,800,000
d. Cash ₱520,000
Notes receivable ₱1,280,000
Unearned revenue from franchise fee ₱1,800,000

On January 1, 2020, Macas Inc. signed an agreement granting Mc Co. to operate as a franchisee for an
initial franchise fee of ₱3,000,000. At that date, an amount of ₱1,000,000 was paid and the balance is
payable in five annual payments of ₱1,043,300. The agreement provides that the down payment is non-
refundable. On April 1, 2020 Mc Co. commences its operations and all services related to franchise rights
required of the franchisor has been substantially performed. In addition to the franchise rights, Macas
shall provide a year long training services beginning on the signing date. These services have a value of
₱120,000.

11. What is the journal entry to be recorded on January 1, 2020 (date of signing the agreement)?
a. Cash ₱1,000,000
Notes receivable ₱2,000,000
Unearned franchise fee ₱120,000
Revenue from franchise fee ₱2,880,000
b. Cash ₱1,000,000
Notes receivable ₱2,000,000
Unearned interest income ₱956,700
Unearned franchise fee ₱2,043,300
c. Cash ₱1,000,000
Notes receivable ₱2,000,000
Unearned interest income ₱956,700
Unearned service revenue - training ₱120,000
Unearned franchise revenue ₱1,923,300
d. Cash ₱1,000,000
Notes receivable ₱2,000,000
Unearned franchise revenue ₱3,000,000

12. What journal entry will be recorded on April 1, 2020 (date of commencement of operations)?
a. Unearned franchise revenue ₱1,923,300
Unearned service revenue – training ₱30,000
Franchise revenue ₱1,923,300
Service revenue – training ₱30,000
b. Unearned franchise revenue ₱2,043,300
Franchise revenue ₱2,043,300
 c. Unearned franchise revenue ₱2,880,000
Unearned service revenue – training ₱120,000
Franchise revenue ₱2,880,000
Service revenue – training ₱120,,000
d. Unearned franchise revenue ₱1,923,300
Franchise revenue ₱1,923,300

13. What is the journal entry to be recorded on December 31, 2020?

a. Unearned franchise revenue ₱2,043,300
Unearned service revenue – training ₱90,000
Franchise revenue ₱2,043,300
Service revenue – training ₱90,000
b. Unearned franchise revenue ₱1,923,300
Franchise revenue ₱1,923,300
c. Unearned franchise revenue ₱90,000
Service revenue – training ₱90,000
d. No entry