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Advance Financial Accounting and Reporting FRANCHISEPart I: Theory of Accounts Under the IFRS, 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 o...

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Advance Financial Accounting and Reporting FRANCHISE

Part I: Theory of Accounts 1. Under the IFRS, how shall revenue from contracts with customers such as revenue from initial franchise fee be recognized by the franchisor? a. b. c. d.

Upon receipt of the initial franchise fee by the franchisor. Upon signing of the franchise agreement. When the franchisor satisfies the performance obligation under the franchise agreement. Applying the legality over the substance of the transaction.

2. Under IFRS, how many entity satisfy a performance obligation under in a contract with customers? a. b. c. d.

Satisfaction of performance obligation over time. Satisfaction of performance obligation at a point in time. Neither A or B. Neither A nor B.

3. IFRS 15 provides that the initial franchise fee shall be recognized as revenue over time (percentage of completion method) if any one of the following criteria provided below is met. Which of the following indicator shows that initial franchise fee shall be recognized as revenue at a point in time instead over time? a. When the franchise simultaneously receives and consumes the benefits provided by the franchisor’s performance as the franchisor performs. b. When the franchisor’s creates or enhances an asset that the franchisee control as the asset is created or enhanced. c. When the franchisor’s performance does not create an asset with alternative use to the franchisor and the franchisor has an enforceable right to payment for performance completed to date. d. When the franchisee has legal title to the franchise and has the significant risks and rewards of ownership of the franchise. 4. Under IFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or revenue for a sales-based royalty? a. When the sales of the franchisee occurs. b. When the performance obligation to which some or all of the contingent franchise fees or sales-based royalty has been satisfied or partially satisfied. c. When both A and B events occur. d. When either A or B events occurs. 5. What is the measurement of franchise revenue recognized from franchise agreement? a. b. c. d.

Fair value of the consideration received or receivable. Book value of the consideration received or receivable. Carrying amount of the consideration received or receivable. Nominal amount of the consideration received or receivable.

Part II: Problem Solving

1. On January 1, 2016, MR. JOVEN entered into a franchise agreement with ONG to market their products. The agreement provides for an initial fee of P12,500,000 payable as follows: P3,500,000 to be paid upon signing of the contract and the balance in five equal annual payments every end of the year starting December 31, 2016. Mr. Joven 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 5 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 franchiser completed the initial services required in the contract at a cost of P4,290,120 and incurred indirect cost of P175,000. The franchisee commenced business operations on November 30, 2016. The gross sales reported to the franchiser were P1,800,000 for December 2016. The first installment payment was made in due date. 1. Assume the collectibility of the note is not reasonably assured, how much is the net income for the year ended, December 31, 2016? a. b. c. d.

3,126,268 3,201,268 2,417,268 3,072,268

2. Assume the collectibility of the note is reasonably certain, how much is the net income for the year ended, December 31, 2016? a. b. c. d.

9,438,880 9,384,880 6,027,520 6,552,520

2. XY Inc., franchisor, entered into franchise agreement with AB Inc., franchise on July 1, 2016. The initial franchise fees agreed upon is P850,000, of which P150,000 is payable upon signing and the balance to be covered by a non-interest bearing note payable in four equal annual installments. It was agreed that the down payment is not refundable, notwithstanding lack of substantial performance of services by franchisor. Probability of collection is unlikely. The following expenses were incurred: Initial services: Direct Cost 235,000 Indirect Cost 64,000 Continuing services: Direct Cost 23,900 Indirect Cost 9,000 The management of AB has estimated that 5hey can borrow loan at rate of 12% (PV factor 3.04). The franchisee commenced its operations on July 31,2016. A continuing franchise fee equal to 5% of its monthly gross sales was also specified in the contract. AB reported gross sales of P950,000 for the month. How much is the net income to be reported on August 31, 2016? a. b. c. d.

59,550 83, 450 48,910 72,810

3. MIKE restaurant sold a fastfood restaurant franchise to Irish. The sale agreement, signed on

January 2016 called for a P100,000 down payment plus two P50,000 annual payments representing the value of initial franchise services rendered by MIKE restaurant. In addition, the agreement required the franchisee to payw 8% of its gross revenues to the franchisor....