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FranchiseItems 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 nec...

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Franchise 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 Answer: 1. dThe 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. 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. 2.AntonTech should recognize revenue for the right to operate a Techshop? a. No transaction b. No revenue c. Point in time d. Over time Answer: 2.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. 3. AntonTech should recognize revenue for the equipment? a. No transaction b. No revenue c. Point in Time d. Over Time Answer: 3. 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 b. No revenue c. Point in Time d. Over Time Answer: 4. d -recognize revenue for the iraining over the two-year period that the training is provided. 5. What if AntonTech also charges franchise es an additional fee for ongoing services providedby the company, the additional fee be recognize as revenue? a. No transaction b. No revenue c. Point in Time d. Over Time Answer: 5. d- In that case, AntonTech would recognize revenue associated with that fee over time

Items 6 to 8 are based on the following information: Dominador'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 Consider the following for allocation of the transaction price at December 31, 20x7. Rights to the trade name, market area, technical and proprietary know-how……………………………….…......P190,000.00 Services-training,e tc………………………………………...94,591.50 Machinery and equipments, etc. (costing, P95,000)……..133,000.00 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% is 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: 6. 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 (reter fo 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 right (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 b. No revenue c. Point in time d. Over time Answer: 7. 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 (servi es and equipment) when it transfer the services and equipment to Doming. 8. How much revenue (franchise revenue, service revenue and sales revenue -machinery and equipments) be recognized on December 31, 20x7? a. Zero. b. P 94,591.50 c. P133,000.00 d. P190,000.00 Answer: 8. a- As of December 31, 20x7, only signing of agreement and receipts of upfront payment and note were made. The entries on December 31, 20x7: Dominador's signs the agreement and receives upfront payment and note. Cash 190,000.00 Notes receivable 285,000.00 Unearned interest income (or Discount on notes receivable 57.408.50 Unearned franchise revenue 190,000,00 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 b. P133,000.00 c. P190,000.00 d. P417,591.50 Answer: 9. 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 90,000.00 Franchise revenue 190.000.00 Unearned service revenue training, etc 94,591.50 Service revenue - training, etc. 94,591.50 Unearned sales revenue – machinery and equipment, etc. . 133,000.0 Sales revenue 133,000.00 Cost of goods sold. 95,000.00 Inventory .... 95,000.00

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. 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? Zero. b. P48,875.00 c. P190,000.00 d. P417,591.50 Answer: 10. b -December 31, 20x8: To record,continuing franchise fees:

Accounts receivable (P4,987,500) x 1%) 48,875.00 Franchise revenue .... 48,875.00 December 31, 20x8: To record payment recelved and interest income on note: Cash... 94,591.50 Notes receivable .. 94,591.50 Unearned interest income (or Discount on notes receivable).... 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 based on the following information: 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 right to opena 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 hardware and software developments, and service techniques; providing business and training manuals; and advertising programs and training. 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 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 b. 1 c. 2 d. 3 Answer: 11. b- Rights to the trade name. market area, and proprietary know-how for 5 years are not individually distinct because each one is 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 (it 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 b. No revenue c. Point in time d. Over time Answer: 12. 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. Xaviery Computers cannot recognize revenue for the royalty payments Not reasonably assured to be entitled to those revenue-based royalty amounts. 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, on a straight-line basis. Continuing franchise fees are recognized when uncertainty related to the variable consideration is resolved. In summary, analysis of the characteristics of the Xaviery franchise indicates that it does not reflect a right that is transferred at a point in time. That is, Xaviery 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: a. None b. P195,000 c. P 975,000 d. P1,160,250 Answer: 13. 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 b. P975,000 c. P1,160,250 d. P1,355,250 Answer: 14. d -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 revenue (P975,000/5) 195,000 Accounts receivable (7% x P16,575,000). 1,160,250 Franchise revenue.. 1,160,250 Items 15 to 10 are based on the following information: 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: 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 b. P150,000

c. P585,000 d. P600,000 Answer: 15. a Total amount of franchise agreement P 600,000 Less: stand-alone selling price of training (15,000) Less: 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 …………………….. 600,000 b. Cash ……………………………………………………..75,000 Notes receivable..............................................................525,000 Unearned franchise revenue……………………… 600,000 c. Cash………………………………………………………75,000 Notes receivable……………………………………………525,000 Franchise revenue…………………………………. 75,000 Unearned franchise revenue................................. 525,000 d. Cash.............................................................................75,000 Notes receivable…………………………………………….525,000 Franchise revenue………………………………….. 600,000 Answer: 16. b-As of July 1, 20x6, Joey Monitor has not fulfilled any of its performance obligatons, 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 b. P450,000 c. P465,000 d. P474,000 Answer: 17. 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 b. P10,000 c. P65,000 d. P70,000 Answer:

18. c -Because Carlos had completed training and was open for business on August 1, 20x6, TopChop 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 b. 75,000 c. P 99,000 d. P111,000 Answer: 19.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 reevenue in 20x6. In addition, since Rachel was a franchisee and using the Pita Pal name and consulting services for the last eight mon ths 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 + P24,000 = P99,000 in 20x6. Items 20 and 21 are based on the following information: 20. Hotel Dian Inc. charges an initial franchise fee of P90,000 broken down as follows: Rights to trade name, market area, and proprietary know-how P40,000 Training services 11,500 Equipment (cost of P10,800) 38,500 Total initial franchise fee P90,000 Upon signing of the agreement, a payment of P40,000 is due. Thereafter two annual payments of P30,000 are required. The credit rating of the franchisee is such that it would have to pay interest of 8% to borrow money. The franchise agreement is signed on August 1, 20x4, and the franchise commences operation on November 1, 0x4. Assuming that no future services are required by the franchisor once the franchise begins operations, the entry on November 1, 20x4 would include a. a credit to Unearned Franchise Revenue for P40,000. b. a debit to Service Revenue for P11,500. c. a debit to Sales Revenue for P38,500. d. a debit to Unearned Franchise Revenue for P40,000 Answer: 20. d 21. Assuming that the franchise agreement is signed on August 1, 20x5, and the franchise commences operationon November 1, 20x5. Assume that the total training fees includes training services for the period leading up to the franchise opening (P5,500 value) and for 3 months following opening. The journal entry on August 1, 20x5 would include a. a credit to Unearned Service Revenue for P11,500 b. a credit to Unearned Service Revenue for P6,000. c. a debit to Sales Revenue for P38,500. d. a debit to Unearned Franchise Revenue for P40,000. Answer: 21. a 22. On January 1, 20x5 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the company to do business under Dairy Treats's name. Dairy Treats had performed substantially all required

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