Franchise Problem Dayag PDF

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Franchise DayagItems 1 to 5 are based on the following information:Assume that AntonTech starts selling TechStop franchises. TrueTech charges. Franchisees an initial fee in exchange for (a) the exclusive right to operate the only TechStop in a particular area for a five-year period, (b) the equipmen...

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Franchise Dayag

Items 1 to 5 are based on the following information: Assume that AntonTech starts selling TechStop franchises. TrueTech charges. Franchisees an initial fee in exchange for (a) the exclusive right to operate the only TechStop in a particular area for a five-year period, (b) the equipment necessary to distribute and repair AntonTech products, and (c) training services to be provided over a two-year period. Similar equipment and training can be purchased elsewhere.

1. how many performance obligations exist in this contract? a. 0 b. 1 c. 2 d. 3

3. AntonTech should recognize revenue for the equipment? a. No transaction

c. Point in Time

b. No revenue

d. Over Time

Answer: C AntonTech would recognize revenue for the equipment at the time the equipment is delivered to the franchisee,

4. AntonTech should recognize revenue for the training? a. No transaction

c. Point in Time

Answer: D

b. No revenue

d. Over Time

The exclusive five-year right to operate the only TechStop in a particular area is distinct because it can be used with other goods or services (furnishings, equipment, products) that the customer could obtain elsewhere. The equipment is distinct because similar equipment is sold separately.

Answer: D

The training is distinct because similar training could be acquired elsewhere. AntonTech would allocate the initial franchise fee to three separate performance obligations based on their relative stand-alone prices: (1) the right to operate a TechStop, (2) equipment, and (3) training.

recognize revenue for the iraining over the two-year period that the training 1s provided.

5. What if AntonTech also charges franchise es an additional fee for ongoing services provided by the company, the additional fee be recognized as revenue? a. No transaction

c. Point in Time

b. No revenue

d. Over Time

Answer: D 2. AntonTech should recognize revenue for the right to operate a Techshop? a. No transaction

c. Point in time

b. No revenue

d. Over time

Answer: D AntonTech would recognize revenue for the right to operate a TechStop over the five- year license period, because AntonTech's ongoing activities over the license period affect the value of the right to run a TechStop.

In that case, AntonTech would recognize revenue associated with that fee over time

Items 6 to 8 are based on the following information: Domuinador's Pizza Inc. enters into a franchise agreement on December 31, 20x7 giving Doming Corp. the right to operate as a franchisee of Dominador's Pizza for 5 years. Dominador's charges Doming an initial franchise fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when Doming Corp. signs the agreement, and the balance is payable in five annual payments of P57,000 each on December 31

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Consider the following for allocation transaction price at December 31, 20x7.

of

the

Rights to the trade name, market area, technical and proprietary know-how P190,000.00 Service training etc.

194,591.50

Machinery and equipments, etc. (costing, P95,000) P133,000.00 Total transaction price

P417,591.50

The credit rating of Doming indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P57,000 each discounted at 8% 1s P227,591.50. The discount of P57,408.50 represents the interest revenue to be accrued by Dominador 's Pizza Inc. over the payment period. Training is completed in January 20x8, the equipment is installed in January 20x8, and Doming holds a grand opening on February 4, 20x8. On February 4, 20x8, franchise opens. Doming also promises to pay ongoing royalty payments of 1% of its annual sales products from Dominador's at its current stand-alone selling prices at the time of purchase. (payable every January 31 of the following year) and is obliged to purchase

6. How many performance obligations exist in this contract for franchise? a. 2 b. 3 c. 4 d. 5 Answer: B There are three performance obligations in the contract for, franchise: 1. Rights to the trade name, market area, and proprietary know-how for 5 years are not individually distinct. Each one is not sold separately and cannot be used with other goods or services that are readily available to the franchisee. Combined rights give rise to a single performance obligation. 2. Training services, and 3. Equipment It should be noted that training (similar) services and equipment are distinct and can be sold separately. Dominador's cannot recognize revenue for the royalty payments because it is not reasonably assured to be entitled to those sales-royalty amounts.

That is, these payments represent variable consideration (refer to Chapter 3 for discussion on variable consideration! Therefore, Dominador's recognizes revenue for the royalties when (or as) the uncertainty is resolved. Dominador's promise to stand ready to provide products to the franchisee in the future at a standalone selling price is not accounted for as a separate performance obligation in the contract because it does not provide Doming with a material night (refer to Chapter 3 for discussion on material right). Thus, revenue from those sales is recorded in the future when the sales are made.

7. When Dominador should recognize revenue for the rights (combined) to the trade name, market area and proprietary know-how which give rise to a single performance obligation? a. No transaction

c. Point in time

b. No revenue

d. Over time

Answer: C Those combined rights (trade name, market areas and proprietary know-how) give rise to a single performance obligation. Dominador's satisfies performance obligation at point in time when Doming obtains control of the rights. That is, once Doming begins operating the store. Dominador has no further obligation with respect to these rights. It should be noted that training (similar) services and equipment are distinct and can be sold separately Dominador's satisfies those performance obligations (services and equipment) when it transfer the services and equipment to Doming. 8. How much revenue (franchise revenue, service revenue and sales revenue machineries and equipments) be recognized on December 31, 20x7? a. Zero.

c. P133,000.00

b. P 94,591.50

d. P190,000.00

Answer: A As of December 31, 20x7, only signing of agreement and receipts of upfront payment and note were made.

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The entries on December 31, 20x7: Dominador's signs the agreement and receives upfront payment and note. Cash

285,000

Unearned interest income (or Discount on notes

P57.408.50

Unearned franchise revenue

190,000

Unearned service revenue training, etc.

94,591.50

Unearned sales revenue machinery and equipment, etc.

133,000.00

9. How much revenue (franchise revenue, service revenue and sales revenue machinery and equipment) be recognized on February 4, 20x83 a. P 94,591.50

c. P190,000.00

b. P133,000.00

d. P417,591.50

Answer: D February 4, 20x8: Franchise opens. Dominador's satisfies the performance obligations related to the franchise rights, training and equipment. That is, Dominador's has no further obligations related to these elements of the franchise. Unearned franchise revenue

P190,000

Franchise revenue Unearned service revenue training, etc

94,591.50

P190,000

Service revenue - training, etc. Unearned sales rev enue - machinery and equipment, etc.

94,591.50 133,000.00

Sales Revenue Cost of Goods Sold

133,000.00 95,000

Inventory

P48,875.00

Franchise revenue

P48,875.00

December 31, 20x8: To record payment received and interest income on note:

P190,000

Notes receivable

Accounts receivable (P4,987,500) x 1%)

95,000

As indicated, when Doming begins operations, Dominador's Pizza satisfies the performance obligations related to the franchise rights, training and equipment under the franchise agreement. That is, Dominador's has no further obligations related to these elements of the franchise.

Cash

94,591.50 Notes receivable

94,591.50

Unearned interest income (or Discount on notes receiv able)

18.207.32

Interest income (P227,591.50 x 8%)

18.207.32

Recognition of Franchise Rights Revenue Over Time Depending on the economic substance of the rights, the franchisor may be providing access to the right rather than transferring control of the franchise rights. In this case, the franchise revenue is recognized over time, rather than at a point in time.

Items 11 to 14 are information:

based on the following

Xaviery Computers is a franchisor and provides a range of computing services hardware/software installation, repairs, data backup, device syncing, and network solutions) on popular Samsung, Dell, Acer and other PC devices. Each franchise agreement gives a franchisee the night to open a Xaviery outlet and sell Xavierys' products and services in the area for five (5) years. Under the contract Xaviery also provides the franchisee with a number of services to support and enhance the franchise brand, including: advising and consulting on the operations of the store; communicating new developments, and

hardware

and

software

service techniques; providing business and training manuals; and advertising programs and training.

10. How much continuing franchise revenue be recognized on December 31, 20x8, assuming the sales of P4,987,500 was generated for the first year of operations? a. Zero.

c. P190,000.00

b. P48,875.00

d. P417,591.50

Answer: B December 31, 20x8: To record, continuing franchise fees:

As an almost entirely service operation (all materials and other supplies are purchased as needed by customers), Xaviery provides few upfront services to franchisees. Instead, the franchisee recruits service technicians, who are given Xavierys' training materials (online manuals and tutorials), which are updated for technology changes, on a monthly basis at a minimum. Xaviery enters into a franchise agreement on December 15, 20x7, giving a franchisee the rights to operate a Xaviery franchise in Cagayan Valley for

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five (5) years. Xaviery charges an initial franchise fee of P975,000 for the right to operate as a franchisee, payable upon signing the contract. Xaviery also receives ongoing royalty payments of 7% of the franchisee 's annual sales (payable each January 11 of the following year).

11. How many performance obligations exist in this contract for franchise? a. none

c. 2

b. 1

d. 3

on a straight-line basis. Continuing franchise fees are recognized when uncertainty related to the variable consideration is resolved. In summary analysis of the Xavier franchise indicates that it does not reflect a right that is transferred at a point of time. That is, Xavier has a continuing obligation to provide updated materials and ongoing support, suggesting the control of the right has not been transferred to the franchisee. Thus, revenue from the franchise rights is recognized over time.

13. The franchise revenue on December 31,20x7 should be:

Answer: B Rights to the trade name. market area, and proprietary know-how for 5 years are not individually distinct because each one 1s not sold separately and cannot be used with other goods or services that are readily available to the franchisee. In addition, these licensed rights have a close connection with the underlying Xaviery's intellectual property (its ability to keep its service and training materials up to date). Therefore, those combined rights and the ongoing training materials are a single performance obligation.

12. The franchise revenue should be recognized: a. No transaction

c. Point in time

b. No revenue

d. Over time

a. None

c. P 975,000

b. P195,000

d. P1,160,250

Answer: A December 15, 20x7: Franchise agreement signed and receipt of upfront payment and note: Cash

975,000 Unearned franchise revenue

975.000

14. The franchise revenue on December 31, 20x8 should be: a. P 195,000

c. P1,160,250

b. P975,000

d. P1,355,250

Answer: D Answer: D Xaviery satisfies the performance obligation over time. That is, once the franchisee begins its operating a Xaviery franchise, Xaviery is providing access to the rights and must continue to perform updates and services.

December 31, 20x8: Franchise begins operations in January 20x8 and records P16,575,000 of revenue for the year ended December 31, 20x8: Unearned franchise revenue

195,000

Franchise rev enue (P975,000/5)

Xaviery Computers cannot recognize revenue for the royalty payments Not reasonably assured to be entitled to those revenue-based royalty amounts.

Accounts receivable (7% x P16,575,000) Franchise rev enue

195,000 1,160,250 1,160,250

Items 15 to 19 are based on the following information:

Payments represent variable consideration. Recognize revenue for royalties when (or as) uncertainty is resolved. As indicated, Xaviery satisfies the performance obligations related to the access to the franchise rights and training materials over time (on this case,

Joey Monitor Muffler sells franchise arrangements throughout Luzon and Visayas Under a franchise agreement, Joey receives P600,000 in exchange for satisfying the following separate performance obligations:

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franchisees have a five-year right to operate as a Joey Monitor Muffler retail establishment in an exclusive sales territory franchisees receive initial training and certification as a Joey Monitor Mechanic, and franchisees receive a Joey Monitor Muffler building and necessary equipment. The stand-alone selling price of the initial training and certification is P15,000, and P450,000 for the building and equipment. Joey estimates the stand-alone selling price of the five-year right to operate as a Joey Monitor establishment using the residual approach. Joey Monitor received P75,000 on July 1, 20x6, from Althea and accepted a note receivable for the rest of the franchise price. Joey Monitor will construct and equip Altheas' building and train and certify Althea by September 1, and Altheas' five-year right to operate as a Joey Monitor establishment will commence on September 1 as well.

15. What amount would Joey calculate as the stand-alone selling price of the five year right to operate as a Joey Monitor retail establishment? a. P135,000

c. P585,000

b. P150,000

d. P600,000

Answer: A Total amount of franchise agreement stand-alone selling price of training

P 600,000 (15,000)

stand-alone selling price of building and equip. (450,000)

Stand-alone selling price of five-year right P 135,000

16. What journal entry would Joey Monitor record on July 1, 2016, to reflect the sale of a franchise to Althea? a.

Cash

600,000 Unearned Franchise Revenue

b.

Cash

600,000 75,000

Notes Receivable

525,000

Unearned Franchise Revenue c.

Cash

600,000 75000

Notes Receivable

525000

Franchise Revenue

75,000

Unearned Franchise Revenue d.

Cash

525,000 75,000

Notes Receivable Franchise Revenue

525,000 600,000

Answer: B As of July 1, 20x6, Joey Monitor has not fulfilled any of its performance obligations, so the entire P600,000 franchise fee is recorded as deferred revenue. Cash

75,000

Notes receivable

525,000

Deferred revenue

600,000

17. How much revenue would Joey Monitor recognize in the year ended. December 31, 20x6, with respect to its franchise arrangement with Althea? (Ignore any interest on the note receivable.) a. P 9,000

c. P465,000

b. P450,000

d. P474,000

Answer: D On September 1, 20x6, Joey Monitor has satisfied its performance obligations with respect to training and certifying Perkins and delivering an equipped Joey Monitor building, Therefore, Joey Monitor should recognize revenue of P15,000 + P450,000 P465,000 on that date. In addition, by December 31, 20x6. Joey Monitor has earned 4 months of revenue (September December) associated with the five-year right it granted to Althea, so Joey Monitor should recognize revenue of P135,000 x (4+ (5 x 12)) = P9,000 associated with that right. Total revenue recognized for the year ended December 31, 20x6, is P465,000+ P9.000 = P474,000. 18. TopChop sells hairstyling franchises. TopChop receives P50,000 from a new franchisee for providing initial training, equipment and furnishings that have a stand-alone selling price of P50,000. TopChop also receives P30,000 per year for use of the TopChop name and for ongoing consulting services (starting on the date the franchise is purchased). Carlos became a TopChop franchisee on July 1, 20x6, and on August 1, 20x6, had completed training and was open for business. How much revenue in 20x6 will TopChop recognize for its arrangement with Carlos? a. Zero

c. P65,000

b. P10,000

d. P70,000

Answer: C Because Carlos had completed training and was open for business on August 1, 20x6, TopChop

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apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize P50,000 of revenue in 20x6. In addition, since Carlos was a franchisee for the last six months of 20x6, TopChop should recognize 6 12 = 50% of a yearly fee of P30,000, or P15,000. In total, TopChop recognizes revenue from Carlos of P50,000 P15,000 = P65,000 in 20x6

19. Pita Pal sells fast-food franchises, Pita Pal receives P75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of P75,000. Pita Pal also receives P36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased) Rachel became a Pita Pal franchisee on march 1, 20x6 and on May 1 20x6, Rachel had completed training and was open for business. How much revenue in 20x6 will Pita Pal recognize for its arrangement with Rachel? a. Zero

c. P 99,000

b. 75,000

d. P111,000

Answer: C Because Rachel had completed training and was open for business on May 1, 20x6, Pita Pal apparently has satisfied its performance obligation with respect to the initial training, equipment and furnishings, so it would recognize P75,000 of revenue in 20x6. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last eight months of 20x6, Pita Pal should recognize 8 12 = 2/3 of a yearly fee of P36,000, or P24,000. In total, Pita Pal recognizes revenue from Rachel of P75,000 + P2...