No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

FRANCHISE ACCOUNTING
1. Franchise fee revenue 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.

2. The party who grants business rights under the franchise.

a. Lessor
b. Franchisor
c. Seller
d. Consignor

3. One of the basic principles of accounting, which dictates that companies recognize
revenue when the performance obligation is satisfied.
a. upfront fees
b. asset-liability approach
c. revenue recognition principle
d. consignee

4. Under IFRS 15, when shall an entity recognize revenue from contracts with customers?
a. When it is probable that future economic benefits will flow to the entity and the
revenue can be measured reliably.
b. When or as the entity satisfies the performance obligation.
c. When the entity collected the cash from the customers.
d. When the entity and the customers sign the contracts.

5. Franchise fee revenue shall be recognized when all material services or conditions have
been substantially performed or satisfied by the franchisor. Substantial performance
means:
A. Franchisor has no remaining obligation or intent to refund money or forgive
unpaid debt.
B. Substantially all initial services have been performed.
C. No other material conditions or obligations exist.
D. All of these define substantial performance by the franchisor.

6. Under IFRS 15, how shall revenue from contracts with customers such as revenue from
initial franchise fee be recognized by the franchisor?
A. Upon receipt of the initial franchise fee by the franchisor.
B. Upon signing of the franchise agreement.
C. When the franchisor satisfies the performance obligation under the franchise
agreement.
D. Applying the legality over the substance of the transaction.

7. Under IFRS 15, how does an entity satisfy the performance obligation on its contracts
with customers?
a. Satisfaction of performance obligation over time.
b. Satisfaction of performance obligation at a point in time.
c. Either A or B.
d. Neither A nor B.

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

8. Direct cost of franchise incurred by a franchisor that are within the score of PFRS 15 are
recognized as expense using the
A. Matching concept
B. Immediate recognition principle
C. Effective interest method
D. Concept of conservatism or prudence

9. Under IFRS 15, where a contract with a customer has multiple performance obligations,
what will be the accounting treatment to the transaction price?
a. The transaction price shall be recognized as revenue to the most important
performance obligation.
b. The transaction price shall be allocated equally to the different performance
obligations.
c. The transaction price shall be allocated to the different performance obligations
by reference to their relative standalone selling prices.
d. The transaction price shall be recognized as revenue only at the end of
completion of all performance obligations.

10. Entity A enters into a franchise contract with Customer X. The agreement provides
Customer X the right to use Entity A's intellectual property. How should Entity A
recognize revenue from the franchise agreement?
A. over time, as the customer receives and consumes the benefit from Entity A's
performance of providing access to its intellectual property to Customer X.
B. at a point in time when Entity A transfers control over the promised license to
Customer X.
C. a or b as a matter of an accounting policy choice
D. when there is "substantial performance" by Entity A in accordance with US GAAP.

11. The primary issues in accounting for franchise fees are

I. the timing of revenue recognition
II. the assurance of collectability of franchise fees
III. the commercial viability of the new business
A. I only
B. I and II
C. I, II and III
D. I and III

12. According to PFRS 15, if the nature of the entity's promise to grant franchise rights in a
franchise agreement is to provide the franchisee the right to use the entity's intellectual
property as it exists at the point in time at which the license is granted, the initial
franchise fee is recognized as revenue
A. when there is substantial performance which is indicated by the commencement of
the franchisee's business
B. at a point in time when the franchise rights are transferred to the franchisee and the
franchisee obtains the ability to use those rights
C. over time, throughout the license period, starting from the time the franchise rights
are transferred to the franchisee and the franchisee obtains the ability to use those
rights
D. b or c depending on the substance of the agreement

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

13. These are the periodic payments made by the franchisee to the franchisor for the
ongoing franchisee support.
A. Initial franchise fee
B. Continuing franchise fee
C. Fixer’s fee
D. Any of these

On December 1, 20x1, BBB Co. granted a 5-year franchise right to AAA, Inc. for an initial franchise
fee of P400,000. The non-refundable initial franchise fee was collected in full upon signing of the
contract. As of December 31, 20x1, BBB has no remaining obligation or intent to refund any of
the cash received, all the services pertaining to pre-opening activities to set-up the contract have
been performed and there are no other material conditions or obligations required of BBB under
the franchise agreement.
14. If the promise to grant the franchise right is not distinct, how should BBB account for
the transaction?
A. BBB should use only the general principles of PFRS 15 to determine whether the
performance obligation is satisfied over time or at a point in time.
B. BBB should use the general principles of PFRS 15 first then the specific principles
to determine whether the grant of license provides the customer the right to
access or the right to use the intellectual property granted.
C. BBB should use only the specific principles of PFRS 15
D. BBB should use the old GAAP (FAS No. 45), i.e., "substantial performance."

15. Direct costs of franchise are

A. recognized immediately as expense in the period they are incurred.
B. recognized as expense when the related franchise fee revenue is recognized.
C. deferred and recognized as expenses at the end of the contract term.
D. capitalized as cost of inventory of the franchisor and charged as expense when
the related goods are sold.

On January 1, 20X3, Entity A granted a franchise right to franchisee. Entity A will allow 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 P40,000,000 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 20,000 units of materials to the franchisee.

The stand-alone selling price of the right to access Entity A's trade-name was P800,000.
The stand-alone selling price of the construction of the stall was P600,000 and the stand-
alone selling price for the delivery of 20,000 units of materials was P200,000.

On October 1, 20X3, Entity already finished the construction of the stall and as of
December 31, 20X3, Entity A only delivered 4,000 units of materials. The franchisee
reported sales revenue on December 31, 2023 in the amount of P8,000,000.

16. Under IFRS 15, what is the revenue recognized pertaining to the delivery of materials?

A. P1,000,000
B. P800,000
C. P100,000
D. P0

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

17. Under IFRS 15, what is the total revenue from initial franchise fee?

A. P40,000,000
B. P18,000,000
C. P0
D. P5,000,000

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Use the following information for the next two questions

On January 1, 2030, WWW granted franchise to HHH. The franchise agreement requires the
franchisee to pay a non-refundable initial franchise fee of P9,000,000 and sales-based royalty of
8% of the sales of the franchisee. The franchisee paid P3,000,000 upon signing of the agreement
and the balance payable in four equal annual installments starting December 31, 2030. The
franchisee’s credit rating indicates that he can borrow money at 7% for a loan of this type.

In relation to the non-refundable initial franchise fee, the franchise agreement required the entity
to render the following distinct performance obligations:
• To construct the franchisee’s stall with stand-alone selling price of P3,600,000.
• To deliver 120,000 units of raw materials to the franchisee with stand-alone selling price
of P4,500,000.
• To allow the franchisee the access to the entity’s tradename for a period of ten years
starting January 1, 2030 with stand-alone selling price of P900,000.

On June 30, 2030, the entity completed the construction of the stall of the franchisee. As of
December 31, 2030, the entity was able to deliver 12,000 units of raw materials to the franchisee.
For the year ended December 31, 2030, the franchisee reported sales revenue amounting to
P3,600,000.

18. How much is the transaction price to be allocated among the performance obligations?

19. How much of the transaction price will be allocated to the construction of the franchisee’s
stall?

20. How much is the amount of revenue to be recognized related to the performance
obligation to deliver raw materials to the franchisee?

21. How much is the amount of revenue to be recognized related to the performance
obligation to provide access to the entity’s tradename?

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Use the following information for the next two questions

On January 1, 2031, AAA sold a franchise for five years, starting January 1, 2031, which requires
an initial franchise fee of P2,400,000. The agreement provides the customer the right to the
tradename and the secret formula for the famous Fries. AAA assesses that the tradename and
the secret formula are not distinct from one another since the two are highly interrelated (i.e.
AAA would not be able to fulfill its promise by transferring each of them separately). The
tradename and secret formula are not sold separately by AAA. The franchise agreement provides
the following terms of payment: Down payment of P600,000; balance payable in equal
installments at the end of each year over the term of the franchise agreement. The balance is
evidenced by a 5% note.

On January 8, 2031, AAA incurs direct contract costs of P600,000 in relation to the contract.

22. Assuming that AAA provides the franchisee the right to use the tradename and secret
formula and has transferred control on January 16, 2031, how much is the gross profit on
the franchise for 2031?
A. P1,590,000
B. P1,258,611
C. P1,500,000
D. P1,336,542

23. Assuming that AAA provides the franchisee the right to access the tradename and secret
formula over the term of the franchise agreement, how much is the gross profit on the
franchise for 2031?
A. P251,721
B. P390,000
C. P389,652
D. P300,000

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Use the following information for the next question:

On January 1, 2031, RRR Shop granted a franchise to a franchisee. The franchise agreement
required the franchisee to pay a nonrefundable upfront fee in the amount of P1,800,000. The
franchisee paid the upfront fee immediately on January 1, 2031.

Under the franchise agreement, the franchisor is required to do the following:

• Construct the franchisee’s stall with stand-alone price of P1,200,000.
• Deliver equipment and supplies to the franchisee with stand-alone price of P450,000.
• Allow the franchisee to use the tradename for a period of five years starting 2031 with
stand-alone price of P750,000.

RRR considers each of the following item above is a distinct performance obligation that is
satisfied at a point in time.

Under the franchise agreement, the tradename will be transferred at the inception of the contract.
The franchisee’s stall was completed on February 1, 2031 while the equipment and supplies were
delivered on February 2, 2031.

24. How much should be recognized as revenue in 2031?

A. P2,400,000
B. P1,800,000
C. P1,350,000
D. P0

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Use the following information for the next four questions:

On January 1, 2030, XXX granted a franchise agreement to YYY. The contract provided that
the franchisee shall pay an initial franchise fee of P3,000,000 and on-going payment of
royalties equivalent to 8% of the sales of the franchisee. On January 1, 2030, the franchisee
paid down payment of P1,200,000 and issued a 3-year noninterest bearing note for the
balance payable in three equal annual installments starting December 31, 2030. The note has
present value of P1,441,098 with effective interest rate of 12%. On June 30, 2030, the entity
completed the performance obligation of the franchise at a cost of PP2,112,876.. Aside from
that, the entity incurred indirect cost of P132,054. The franchisee started operation on July
1, 2030 and reported sales revenue amounting to P300,000 for the year ended December 31,
2030. The franchisee paid the first installment on its due date.

25. If the collection of the note receivable is reasonably assured, what is the gross profit to
be recognized by the entity for the year ended December 31, 2030 in relation to the initial
franchise fee?

26. If the collection of the note receivable is reasonably assured, how much is the total
revenue of the franchisor at the end of the year?

27. If the collection of the note receivable is reasonably assured, what is the net income to
be reported by the entity for the year ended December 31, 2030?

28. If the collection of the note receivable is reasonably assured, how much is the total
revenue from the franchise at the end of the year?

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Use the following information for the next requirement.

On December 1, 2030, KITTEN INC. enters a contract with a customer for a licensed technology.
The entity received Php 9,000,000 as a fixed fee at contract inception. The license period is 4
years. During December 31 2030, KITTEN INC. incurs direct contract costs of Php 1,080,000 and
indirect costs of Php 270,000. The license is transferred to the customer January 2, 2031. The
license is a right to use.

29. Prepare the journal entries from December 31 2030 to January 31 2031 for each
scenario

Use the following information for the next requirement.

On December 1, 2030, KITTEN INC. enters a contract with a customer for a licensed technology.
The entity received Php 9,000,000 as a fixed fee at contract inception. The license period is 4
years. During December 31 2030, KITTEN INC. incurs direct contract costs of Php 1,080,000 and
indirect costs of Php 270,000. The license is transferred to the customer January 2, 2031. The
license is a right to access and is measured using a time basis.

30. Prepare the journal entries from December 31 2030 to January 31 2031 for each
scenario

-END-

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