FRANCHISE

ACCOUNTING
J.VILLENA,CPA

Problem 1. The ST Company sells a franchise that requires an initial franchise fee of P500,000. A
P100,000 down payment is required with the balance in 4 equal monthly installments of
P100,000. All material services have been substantially performed by ST Company, the refund
period has expired, and the collectability of the note is reasonably assured. The interest rate for
this type of loan is 12%.
The unearned franchise revenue earned during the period must be:

Problem 2. Spiral Restaurant sold a fine dining restaurant franchise to Circles Hotel. The sale
agreement signed on January 1, 2013 called for a P875,000 down payment plus P437,500 annual
payments (covered by a non-interest bearing note) representing the value of initial services
rendered by Spiral restaurant. In addition, the agreement required the franchisee to pay 6% of its
gross sales to the franchisor. The restaurant opened in July and its sales for the year amounted to
P6,562,500. Assuming a 15% interest rate is appropriate. How much is the franchisors total
income/revenue for the year ended 2013 profit or loss? (Round of PV factors into 2 decimal
places)

Problem 3. On August 1, 2013, Holiday Inc. entered into a franchise agreement with Intense
franchisee. The initial franchise fees agreed upon is P246,900, of which P46,900 is payable upon
signing and the balance to be covered by a non-interest bearing note payable in four equal annual
installments. The down payment is refundable within 75 days. Intense Inc. has a high credit
rating, thus, collection of the note is reasonably assured. Out of pocket costs of p125,331 and
P12,345 were incurred for direct and indirect expenses, respectively. Prevailing market rate is 9%.
On the FY ended September 30, 2013, how much revenue from franchise fee will the franchisor
recognize? (Round PV factors into 4 decimal places)

Problem 4. Crab Claw Co. charges P90,000 for a franchise, with P18,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the annual
payments, discounted at 9% is P58,315. The franchisee has the right to purchase P20,000 of
equipment for P16,000. If the collectability of the payments is reasonably assured and substantial
performance by Crab Claw has occurred, what is the amount of revenue from franchise fee that
should be recognized?

Problem 5. Casio Co. charges new franchisees an initial fee of P3,500,000. Of this amount,
P1,000,000 is payable in cash when the agreement is signed, and the remainder is to be paid in
four equal annual installments which are evidenced by 12% promissory notes. In consideration
therefore, Casio Co. will assist in locating the business site, conduct a market study to estimate
earnings potential, supervise construction of a building, and provide initial training to employees.
On December 3, 2013, Casio Co. entered into a franchising agreement with Corolla, Inc. By the
end of the year, Casio Co. has completed about 25% of the initial services at a cost of P250,000
and it has ascertained that collection of the notes is reasonably assured. For 2013, Casio Co.
should recognize unearned franchise revenue of:

Problem 6. On January 1, 2012, Mr. DJ entered into a franchise agreement with GB to market
their products. The agreement provides for an initial fee of P12.5m 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, 2012. Mr. DJ 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 franchisor completed the initial services required in the contract at a cost of
P4,290,120 and incurred indirect costs of P175,000. The franchise outlet commenced business
operations on November 30, 2012. The gross sales reported to the franchisor were P1,800,000 for
December, 2012. The first installment payment was made in due date, but further collection of
the balance was not reasonably assured. Calculate the net income for 2012 that the franchisor
will report in its income statement.

Problem 7. On April 30, 2013, Mike Inc. entered into a franchise agreement with Ross Co. to sell
their products. The agreement provides for an initial franchise fee of P1.20M which is payable as
follows: P400,000 cash to be paid upon signing the contract, and the balance in five equal annual
installments every December 1, starting in 2013 as evidenced by a noninterest bearing note for
the said balance signed by Mike Inc. Prevailing market rate is 10% on April 30, 2013.The
agreement further provides that Mike Inc. must pay a continuing franchise fee equal to 5% of its
monthly gross sales. Ross Co. incurred direct cost of P540,000, of which P170,000 is related to

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 FRANCHISE
ACCOUNTING
J.VILLENA,CPA
continuing services and indirect costs of P72,000, of which P18,000 is related to continuing
services. Mike Inc. started operations on September 2, 2013 and was able to generate sales of
P950,000 for 2013. The first installment payment was made in due date. Assuming collectability
of the note is not reasonably assured, how much is the net income of the franchisor as of
December 1, 2013? (Round off PV factors to 4 decimal places and GP % to whole %)

Problem 8. On December 31, 2013, BonChon Inc. authorized ZubuChon to operate as a

franchisee for an initial franchise fee of P3.40M. Upon signing the contract, P0.90M was received
and the balance is paid by a note, due in 5 equal annual installments that include 12% interest,
beginning December 31, 2014. The down payment is nonrefundable and it represents a fair
measure of the services already performed by BonChon and substantial future services are still
required. How much is the unearned revenue to be recognized as of December 31, 2013? (Round
off PV factors to 5 decimal places)

Problem 9. On January 2, 2013, CeCe Co. entered into franchise agreement with Drake Inc.,
franchisee. The sale agreement was to make a P60,000 down-payment plus two P20,000 annual
payments, representing the value of initial franchise services rendered by CeCe. In addition, the
agreement required Drake to make an annual fixed payment of P36,000 to CeCe. CeCe estimates
that continuing services will cost P40,000 per year (actualized in 2013). A reasonable profit from
such services is estimated at 7.5% of cost (or P3,000/year). Drake commenced operations on
March 1, 2013. Assuming a 10% interest rate is appropriate, CeCes CY 2013 total
income/revenue: (Round off PV factors to 4 decimal places)

Problem 10. On December 1, 2012, Gamble, Inc. authorized Cedar Company to operate as a
franchise for an initial franchise free of P1,000,000. On this amount, P600,000 was received upon
signing the agreement and the balance, represented by a note, is due in four annual payments of
P100,000 each beginning December 31, 21012. Those present value on December 31, 2012, for
four annual payments appropriately discounted a P303,740. According to the agreements the
non-refundable down payment represents a fair measure of the services already performed by
Gamble and substantial future service are still to be rendered. However, collectability of the note
is reasonably certain. Gambles December 31, 2012 income statement should report earned
franchise fee from Cedar Company in the amount of

Problem 11. On January 1, 2013, Kamiseta, Inc. signed an agreement authorizing Mr. Geri de
Castro to operate as a franchisee for an initial franchise fee of P5,000,000. Of this amount,
P2,000,000 was received upon signing of the agreement and the balance evidenced by a 16%
promissory note which is due in three annual installments of P1,000,000 each beginning
December 31, 2013. Mr. de Castro started franchise operations on September 1, 2013 after
Kamiseta rendered initial services required at a total cost of P1,500,000. The first installment was
collected on due date. The collectibility of the note is not reasonably assured. How much net
income is to be recognized on December 31, 2013?

Problem 12. On January 2, 2013, Magnolia Ice Cream signed an agreement authorizing Jomari to
operate as franchisee for an initial franchise fee P500,000 received upon signing of the
agreement. Jomari commenced operations on August 1, 2013, at which date all of the initial
services required of Magnolia Ice Cream had been performed at a cost of P100,000. The franchise
agreement further provides that Jesse must pay a 10% monthly continuing franchising fee. Sales
reported from August 1 to December 31, 2013 amounts to P400,000. How much is the initial
franchise fee to be recognized in 2013?

Problem 13. On December 31, 2012, Noynoy Company authorized Mar to operate as a
franchisee for an initial franchise fee of P3,000,000. Of this amount, P1,200,000 was received
upon signing of the contract, and the balance payable by a non-interest bearing note, due in three
annual payments of P600,000, beginning December 31, 2013. The collectibility of the note is not
reasonably assured. The market rate of interest is 18%. (Use two decimal places for present
value factor.) How much is the interest revenue on December 31, 2013?

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