Sample/practice exam 2020, questions and answers PDF

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ACCOUNTING FOR FRANCHISEApplying Steps 2 to 5 of PFRS 15I. On January 1, 20x1, ABC Co. enters into a franchise contract with a customer to grant the right to open a store in a specified location. The store will bear ABC Co.’s trade name and the franchisee will have the right to sell ABC’s products f...

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ACCOUNTING FOR FRANCHISE Applying Steps 2 to 5 of PFRS 15 I. On January 1, 20x1, ABC Co. enters into a franchise contract with a customer to grant the right to open a store in a specified location. The store will bear ABC Co.’s trade name and the franchisee will have the right to sell ABC’s products for 7 years, starting on the commencement of operations of the new store. The contract requires the franchisee to pay a P1,400,000 non-refundable up-front fee (initial franchise fee). The franchise contract requires ABC Co. to maintain the brand through product improvements, marketing campaigns, research and development, and other activities that would strengthen the brand’s marketing position. The franchisee’s new store started operations on July 1, 20x1. Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) a performance obligation is satisfied II. On January 1, 20x1, Pongcuter Co. enters into a contract with a customer to grant a software license for P1.0M. The fee is payable at contract inception. The license has a term of 4 years, to reckon from the date the customer can use the software. The customer can determine how and when to use the right without further performance by Pongcuter CO., and does not expect that Pongcuter Co. will undertake any activities that significantly affect the intellectual property to which the customer has rights. The software is transferred to the customer on February 1, 20x1. However, the code, which is necessary for the customer to use the software, is transferred only on April 1, 20x1. Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) a performance obligation is satisfied 0

Chapter 8 Accounting for Franchise Operations - Franchisor NAME: Professor:

Section:

Date: Score:

QUIZ 1:

1. You ar e an ac c ount ant .Yourc l i e nt ,a f r anc hi s or ,as ked you f oran advi c er egar di ng t he r e c ogni t i onofr e venuef r om af r anc hi s ec ont r ac t .Youradvi c et oyourc l i entwoul dmos tc e r t ai nl y bebas e donwhi c hoft hef ol l owi ngs t andar ds ? a .F ASNo. 45( USGAAP)

b. PFRS15 c . PAS15 d. PFRS18 2. Thec ons i der a t i onr ec e i ve df r om ac ont r ac twi t hac us t ome rt hatdoe snotme e tt hec r i t er i aunder ‘ St e p1’ofPFRS15i s a. recognized as liability. b. recorded through memo entry only. c. disclosed only. d. b and c 3. Ent i t yA e nt er si nt oaf r anc hi s ec ont r ac twi t hCus t omerX.Thea gr ee me ntpr ovi de sCus t ome rX t her i ghtt oac c es sEnt i t yA’ si nt el l ec t ualpr oper t y.How s houl dEnt i t yA r ec ogni zer eve nuef r om t hef r anc hi s ea gr ee ment ? a . ove rt i me ,asCus t ome rXr ec e i ve sandc ons ume st hebe ne fitf r om Ent i t yA’ sper f or manc eof pr ovi di ngac c es st oi t si nt el l ec t ualpr oper t y. b. a tapoi nti nt i mewhenEnt i t yAt r ans f er sc ont r olove rt hepr omi s edl i c ens et oCus t ome rX. c . aorbasama t t erofanac c ount i ngpol i c yc hoi c e d. whe nt he r ei s“ s ubs t ant i alper f or manc e”byEnt i t yA i nac c or danc ewi t hUSGAAP.

Use the following information for the next two cases: On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a fixed fee of ₱100,000 payable as follows:  20% is payable upon signing of contract.  80% is represented by a note receivable collectible in 4 equal annual installments starting December 31, 20x2. The appropriate discount rate is 12%. Case #1: 4. Thel i c e ns epr ovi de sCus t ome rX t her i ghtt ous eEnt i t yA’ spa t e nt edpr oc es s e s .Cus t omerX c ont i nue st ooper at eus i ngi t st r adenameandhast hedi s c r et i onofde ve l opi ngane w pr oduc t namef ort hepr oduc t si twi l lpr oduc eus i ng t hepat ent ed pr oc es s es .Thel i c ens edoe snot e xpl i c i t l yr equi r eEnt i t yA t ounder t akeac t i vi t i e st ha twi l ls i gni fic ant l yaffe c tt hei nt e l l ec t ual pr oper t yt owhi c hCus t omerA hasr i ght s .Ne i t herdoesCus t omerX e xpec tt ha tEnt i t yA wi l l unde r t akes uc hac t i vi t i es .Ent i t yA gr ant st hel i c ens et oCus t ome rXonDec e mber31,20x1.How muc hr evenuef r om t hef r anc hi s ec ont r ac twi l lEnt i t yA r ec ogni zei n20x1? a. 80, 747 b. 21, 187 c . 20, 000 d. 0 e. Di s c us ss t eps

Case #2: 5. Thel i c e ns epr ovi de sCus t ome rXt her i ghtt ous eEnt i t yA’ spa t ent e dpr oc es s es .Thea gr ee me nt r e qui r esCus t ome rXt odi s c ont i nueus i ngi t st r adenameandi ns t eadus eEnt i t yA’ st r adename . Cus t ome rXi sboundbyt het er msoft hec ont r ac tt oabi dewi t hEnt i t yA’ spol i c i e sont heus eof

t hepr oc es s esbuti sgi vent her i ghtt oanys ubs e que ntmodi fic a t i onst ot hepr oc e s s e s .How muc h r e ve nuef r om t hef r anc hi s ec ont r ac twi l lEnt i t yA r ec ogni zei n20x1? a . 80, 747 b. 20, 187 c . 20, 00 0 d. 0

“Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God.” - (Philippians 4:6)

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ANSWERS TO QUIZ 1:

1. B 2. A 3. A 4. A Solution: Cash down payment (100,000 x 20%)

20,000

PV of note receivable: [(100K x 80%) ÷ 4] x PV of ordinary annuity @12%, n=4 Transaction price

60,747 80,747

The license provides the customer the right to use the entity’s intellectual property. Accordingly, the performance obligation is satisfied at a point in time (i.e., Dec. 31, 20x1 grant date). 5. D Solution: The license provides the customer the right to access the entity’s intellectual property. Accordingly, the performance obligation is satisfied over time.

Entity A starts recognizing revenue in 20x2 when Customer X starts receiving the benefits of Entity A’s performance of providing access to the patented processes.

1. OnJ anuar y1, 20x1,ABCCo.e nt er si nt oac ont r ac twi t hac us t ome rt ot r ans f eral i c ens e .  Thei ni t i alf r anc hi s ef eei s₱100, 000pa yabl easf ol l ows :20% c as h down pa yme ntupon s i gni ngoft hec ont r ac tand t hebal anc ei spa yabl ei n4equalannuali ns t al l me nt ss t ar t i ng Dec e mber31, 20x1. Theappr opr i a t edi s c ountr a t ei s12%.  Thec ont r ac tal s or equi r esABC Co.t ot r ans f ere qui pme ntt ot hec us t omer .Theequi pme nt hasac os tof₱30, 000andas t andal ones e l l i ngpr i c eof₱40, 000.  Thel i c e ns ehasas t andal ones e l l i ngpr i c eof₱38, 000.  ABCCo. r e gul ar l ys e l l st hel i c ens eandt heequi pme nts epar a t e l y .  Thel i c ens epr ovi de st hec us t ome rt her i ghtt ous et hee nt i t y’ si nt el l e c t ualpr ope r t yasi t e xi s t sa tt hepoi nti nt i mea twhi c ht hel i c e ns ei sgr ant ed.  Theequi pmenti st r ans f er r ed t ot hec us t ome ron J anuar y 15,20x1whi l et hel i c e ns ei s t r ans f er r edt ot hec us t ome ronFe br uar y1,20x1. How muc hr e ve nuei sr e c ogni ze donFebr uar y1, 20x1? a . 80, 747

b. 41, 409 c . 39, 33 8 d. 0 C Solution: The two separate performance obligations in the contract are as follows: 1. License (satisfied at a point in time) 2. Equipment (satisfied at a point in time) The transaction price is sum of the 20% cash down payment and the present value of the future cash flows from the note receivable. This is computed as follows: Cash down payment (100,000 x 20%) PV of note receivable: [(100K x 80%) ÷ 4] x PV of ordinary annuity @12%, n=4 Transaction price

20,000 60,747 80,747

The transaction price is allocated to the performance obligations in the contract on the basis of their stand-alone selling prices. The allocation is done as follows: Performance obligations License Equipment Totals

Stand-alone selling prices 38,000 40,000 78,000

Allocation (80,747 x 38K/78K) (80,747 x 40K/78K)

Transaction price 39,338 41,409 80,747

The ₱41,409 allocated to the equipment will be recognized as revenue on January 15, 20x1 while the ₱39,338 allocated to the license will be recognized as revenue on February 1, 20x1.

CONTRACT COSTS (a) 1. Incremental Costs of obtaining a contract -recognized as asset if they are recoverable and avoidable. As a practical expedient, the costs are recognized as expense if their expected amortization period is 1 year or less.

2. Costs to fulfill a contract if within the scope of PFRS 15, they are recognized as asset if they are: (a) directly related to a contract, (b) generate or enhance resources, and (c) recoverable Otherwise, expensed. DIRECT COSTS – (Incremental cost of obtaining a contract and cost to fulfill a contract) -

Avai l abl ec os t sdi r ec t l y as s oc i a t ed wi t ht hef r anc hi s eagr ee me nt .I ni t i al l yr ec ogni ze d as ASSET and s ubs e quent l yr ec ogni ze d ase xpe ns ewhe nt her el a t e df r anc hi s er eve nuei s r e c ogni ze d.Ac c or di ngl y ,i ff r anc hi s er e ve nuei sde f er r e d,di r ec tc os t sar eal s o def e r r e d. Howe ver ,def e r r ed c os t ss hal lnote xc e ed t heamounte xpec t ed t ober e c ove r ed f r om t he c ont r ac t .

INDIRECT COSTS -

Cos t ss uc hass el l i ngandadmi ni s t r at i vec os t snotdi r ec t l yas s oc i at edwi t ht hef r amc hi s e agr eementandar ei nc ur r edeveni nt heabs enc eofaf r anc hi s eagr eement .I ndi r ec tc os t s ar er ec ogni zedi mmedi at el yasexpens ei nt heper i odt heyar ei nc ur r ed.

Sample Problem: On December 1, 20x1, ABC Co. enters into a contract with a customer to grant a license over a patented technology. The consideration in the contract is a fixed fee of P1,00,0000, payable at contract inception. The license period is 4 years. Druing December 20x1, ABC Co. incurs direct contract costs of P120,000 and indirect costs of P30,000. The licencse is transferred to the customer on January 2, 200x2.

Case 1 Right to use:

The license provides the customer the right to use the entity’s intellectual property as it exists at the point in time at which the license is granted. Jouornal Entries Dec. 1, 20xq Cash

1,000,000 Contract liability 1M

Dec.31 20x1 Deferres contract costs120k Expense (indirect costs)30k Cash

150k

Jan 2, 20x2 Contratc Liability 1M Revenue 1M Cost of license (exoense)120k Deferred contract costs 120k

Case 2 Right to Access

The license provides the customer the right to access the entity’s intellectual property as it exists throughout the license period. ABC Co. uses a time-based method in measuring its progress towards the complete satisfaction of the performance obligation. Dec.1. 20x1 Cash Contract liability 1M Dec. 20x1 Deferred contract costs 120K Expense (indirect cost)30k Cash 120: Jan.2 No entry Jan.31 Contract Liability (1M/4 x 1/12) 20,833,33 Revenue

Cost of License (120/4 x 1/12) 2,500 Deferred contract cost

III. Wynne Inc. charges an initial franchise fee of P1,840,000, with P400,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is P1,091,744.

The franchisee has the option to purchase P240,000 of equipment for P192,000. Wynne substantially provided all initial services required and collectability of the payments is reasonably assured The amount of revenue from franchise fees: Answer: P1,443,744 400K + 1,091,744 – 48,000 IV. Frozen Delight, Inc. charges an initial franchise fee of P75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount P25,000 is collected immediately. The remainder is collected in four equal installments of P12,500 each. These installments have a present value of P41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of P2,000) to help franchisees get the store ready to open. The franchise agreement is signed of April 1, 20x5, training is completed, and the store opens on July 1, 20x5. The amount of revenue from training and franchise on April 1, 20x5 to ________ 0 The amount of revenue from training and franchise on July 1, 20x5 to ________ 66,402...