Chapter 9

Problem I
The entries for the above transactions are as follows:

December 31, 20x7

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,000.
....... 00
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855,000.
..... 00
Unearned interest income (or Discount on notes *172,225.
receivable) . . 50
Unearned franchise 570,000,0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Unearned service revenue – training, etc. . . . . . . . . . . . . . . . 283,774.5
.... 0
Unearned sales revenue – machinery and equipments, etc. . 399,000.0
.. 0
*discrepancy of P22.80.
February 28, 20x8
Unearned franchise revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,000.
..... 00
Franchise 570,000.0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Unearned service revenue – training, 283,774.
etc. . . . . . . . . . . . . . . . . . . . . . 50
Service revenue – training, etc. 283,774.5
0
Unearned sales revenue – machinery and equipment, etc.. . . . . 399,000.
.. 00
Sales 399,000.0
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Cost of goods 285,000.
sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000.0
...... 0

Problem II
March 20:
Cash 5,000
Notes receivable 20,000
Unearned franchise fee 25,000

June 15:
Unearned franchise revenue 25,000
Franchise revenue 25,000

July 15:
Cash 500
Service revenue 500

Problem III – Franchises; Residual Method

Requirement 1
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 equipment __(450,000)
Stand-alone selling price of five-year right P 135,000
Requirement 2
As of July 1, 20x6, Monochrome 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

Requirement 3
On September 1, 20x6, Monochrome has satisfied its performance obligations with respect
to training and certifying Perkins and delivering an equipped Monochrome Muffler building.
Therefore, Monochrome should recognize revenue of P15,000 + P450,000 = P465,000 on
that date. In addition, by December 31, 20x6, Monochrome has earned 4 months of revenue
(September – December) associated with the five-year right it granted to Pentagon, so
Monochrome should recognize revenue of P135,000 × (4 ÷ (5 × 12)) = P9,000 associated
with that right. Total revenue recognized for the year ended December 31, 20x6, is
P465,000 + P9,000 = P474,000.

Problem IV
1. The journal entries shown below would be made on the consignor’s and consignee’s
books (assume the use of perpetual inventory):

Entries on Consignor’s Books Entries on Consignee’s Books

Transactions (Herbalife Supplier) (Conrado Enterprises)
Inventory on
Shipment of goods Consigment…… 60,00 No entry
on consignment. Finished 0 (memorandum
Goods 60,00 entry only)
Inventory*.... 0

2. Payment of
expenses by Inventory on No entry
consignor. Consignment….. 600
Cash…….. 600

3. Payment of Consignor
expenses Inventory on Receivable
by consignee. Consignment…… 2,400 2,400
Consignee Cash……………. 2,400
Payable……… 2,400
Advances by Cash……… 3,360 Advances to
Consignor Advances from Consignor 3,360
Consignee….. 3,360 Cash 3,360
Cash 48,00
Sale of merchandise No entry. Consignor 0 48,00
payable 0
Consignor
Payable..
6. Notification of sale Commission Commission
to consignor and expense
payment of cash Advances from 4,800 Revenue…….. 48,00
due. Consignee…… Consignor 0
Commission: Cash……. 3,360 Receivable 4,800
10% x P48,000 = Consignee 37,44 …..
P4,800 Payable 0 Cash……… 2,400
Consignment 2,400 Advances 37,44
Sales 48,00 from 0
Revenue.. 0
Consignee…… 3,360
 7. To record cost of
goods sold and Cost of goods 31,50
related costs. sold** 0
** (P60,000 + P600 Inventory on 31,50
+ Consignment 0
P2,400) x ½ =
P31,500
*if periodic method is used, the credit should be “consignment shipments” account treated
as reduction in the Costs of goods available for sale to arrive at Cost of Goods Sold Available
for Regular Sale.

2. The remittance amounting to P37,440 can be determined by preparing the Account Sales
as follows:

Sold for the Account of:

Jingka Juice
Sales (60 sachets of herbal goods) P48,000
Charges:
Finishing costs…………………….. P 2,400
Commission (P48,000 x 10%)……………….. 4,800 7200
Due to Consignor……………………………. P40,800
Less: Advances………………. 3,360
Balance………………………… P37,440
Remittance Enclosed……………… 37,440
Balance Due…………… P 0
Items on Hand (50 sachets of herbal goods): P60,000 x
50% P30,000

Problem V
1. The account sales:
Sold for the Account of:
AA Company
Sales (8 sets @ P24,000)……………… P
192,000
Charges:
Freight-in…………… P 6,000
Advertising expense………… 2,400
Deliveries and installation expenses 9,600
Repairs expense – on units sold.. 4,800
70,80
Commissions, 25% of sales 48,000 0
Due to Consignor……………………………. P121,200
Less: Advances………………. 0
Balance………………………… P121,200
Remittance Enclosed……………… 30,000
Balance Due…………… P 91,200
Items on Hand………… 15 sets
Items Returned (defective)….……. 2 sets

2. The inventory on consignment amounted to P189,000 computed as:

Charge Analysis
Sales Inventor Total
(8 sets) y (25 sets)
(15 sets)
 Charges by consignor:
Cost of consigned goods
(@P12,000/set) P 96,000 P180,000 P 300,000
Freight-out (P9,000/25 sets = P360 per 3,600* 5,400 9,000
set)
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per 2,400* 3,600 6,000
set)
Advertising expense………….. 2,400 0 2,400
Delivery and installation 9,600 0 9,600
Repairs expense…………… 4,800 0 4,800
Commissions [25% of sales (8 sets x
P24,000 per set] 48,000 0 ___48,000
Total P166,800 P189,000 P379,800
* Freight on sets returned is charged against sales of the period.
** Normally, the term “freight-out” is synonymous to “delivery expense” which is
classified as selling expenses if we are dealing with a third party. But, for consignment
accounting where the transfer of merchandise if from consignor to consignee, the
usage of the term “freight-out” does not construed to be a selling expense but still an
inventoriable cost (which is part of freight-in).

The consignment net income amounted to P25,200 computed as:

Consignment Sales (8 sets x P24,000 per set) P 192,000
Less: Costs and expenses:
Charges by Consignor:
Cost of consigned goods @P12,000/set) P 96,000
Freight-out (P9,000/25 sets = P360 per set) 3,600* 99,600
Charges by consignee:
Freight-in (P6,000/25 sets =P240 per set) P 2,400*
Advertising expense………….. 2,400
Delivery and installation 9,600
Repairs expense…………… 4,800
Commissions [25% of sales (8 sets x P24,000 per set] 48,000 67,200
Net Income P 25,200

Problem VI
Summit Electronics Company
Inventory on Consignment (800 @ P570) 456,000
Finished Goods Inventory 456,000

Consignment Expense (P368,000 x 30%) 110,400

Accounts Receivable--Consignee Sales 257,600
Sales Revenue—Consignment (P920 x 400) 368,000

Cost of Consigned Goods Sold (P570 x 400) 228,000

Inventory on Consignment 228,000

Cash [(P920 x 70%) x 380] 244,720

Accounts Receivable--Consignee Sales 244,720

Farley Hardware
No entry upon receipt of consigned merchandise.
 Cash (P920 x 400) 368,000
Consignor Payable 257,600
Commission Revenue 110,400

Consignor Payable 244,720

Cash 244,720

Problem VII
1. Jollibee has substantially performed all material services, the refund period has
expired, and the collectibility of the note is reasonably assured. Jollibee recognizes
revenue as follows:

Cash……….. 240,000
Notes receivable……………. 600,000
Franchise revenue…………………….. 840,000

2. The refund period has expired and the collectibility of the note is reasonably
assured, but Jollibee has not substantially performed all material services. Jollibee
does not recognize revenue, but instead recognizes a liability as follows:

Cash……….. 240,000
Notes receivable……………. 600,000
Unearned franchise revenue…………………….. 840,000

Franchisor will recognize the unearned franchise fees as revenue when it has
performed all material services, the adjusting entry to record the revenue then would
be:

Unearned franchise revenue……………………... 840,000

Franchise revenue….……. 840,000

3. Jollibee has substantially performed all services and the collectibility of the note is
reasonably assured, but the refund period has not expired. Jollibee does not
recognize revenue, but instead recognizes a liability as follows:

Cash……….. 240,000
Notes receivable……………. 600,000
Unearned franchise revenue…………………….. 840,000

The franchisor will recognize the unearned franchise fees as revenue when the
refund period expires, the adjusting entry to record the revenue then would be:

Unearned franchise revenue……………………... 840,000

Franchise revenue….……………………………….. 840,000

4. Jollibee has substantially performed all services and the refund period has expired,
but the collectibility of the note is not reasonably assured. Jollibee recognizes revenue
by the installment or cost recovery method. If we assume that Jollibee uses the
installment method, it recognizes revenue of P240,000 as follows:

Cash……….. 240,000
Notes receivable……………. 600,000
Franchise revenue…………………….. 240,000
Unearned franchise revenue…………… 600,000
 The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost of
franchise, the entry would be as follows:
Unearned franchise revenue…………… 120,000
Franchise revenue…………………….. 120,000
This revenue recognition may be true only in the event there is no cost of franchise at
all. On the other hand, it may be somewhat misleading since under the installment
sales method; gross profit is earned or realized thru collections.

5. The refund period has expired, but Jollibee has not substantially performed all
services and there is no basis for estimating the collectibility of the note. Jollibee
does not recognize the note as an asset. Instead, it uses a form ·of the deposit
method. For example, suppose Jollibee has developed an entirely new product
whose success is uncertain and the franchisee will pay the note from the cash
flows from the sale of the product, if any. Jollibee records the initial transaction as
follows:

Cash……….. 240,000
Unearned franchise revenue…………………….. 240,000

The franchisor may recognize the unearned franchise fees as revenue under the
accrual method in the normal manner at the completion of the services to be
performed (if collectibility is reasonably assured), the adjusting entry to record the
revenue then would be:
Unearned franchise revenue……………………... 240,000
Franchise revenue….……………………………….. 240,000

Alternatively, it may recognize revenue under the installment method if it has no basis
for estimating the collectibility of the note.
6. Now assume that Jollibee has earned only P360,000 from providing initial
services, with the balance being a down payment for continuing services.
If the refund period has expired and the collectibility of the note is
reasonably assured, Jollibee recognizes revenue of P360,000 as follows:
Cash……….. 240,000
Notes receivable……………. 600,000
Franchise revenue…………………….. 360,000
Unearned franchise revenue………….. 480,000
The franchisor recognizes the unearned franchise revenue of P480,000 as revenue
when it performs the continuing services, the adjusting entry to record the revenue
then would be:
Unearned franchise revenue……………………... 480,000
Franchise revenue….……………………………….. 480,000
In all these cases except the fifth, the franchisor accounts for the collection of interest
and principal on the note receivable in the usual manner. In the fifth situation, it does
not recognize the note and revenue until a future event occurs. In addition, the
franchisor accounts for its costs in the same way as its revenue recognition. That is, if
it defers revenue, then it defers the related cost of goods sold. Then, when it
recognizes revenue, it matches the cost of goods sold against the revenues. The
franchisee accounts for its payments as an intangible asset.
 Sometimes the franchisor collects the initial franchise fee far in advance of performing
its services. At other times collection of part of the initial franchise fee is deferred until
the franchise is operating successfully.
Problem VIII
1.
Cash ......................................... 75,000
Unearned Franchise Fee ..................... 75,000
2.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 166,119
[P{75,000 + (P30,000 x 3.0373)] = P116,119
(Table IV n = 4, i = 12%)
3.
Cash ......................................... 75,000
Note Receivable .............................. 120,000
Unearned I.I. or Discount on Note Receivable 28,881
Revenue from Franchise Fee ................. 75,000
Unearned Franchise Fee ..................... 91,119

Problem IX
1. If there is a reasonable expectation that the down payment may be refunded and substantial future services remain to be performed by Pizza,
Inc., the entry should be:
Cash………………………………………………………………………….. 120,000.0
0
Notes receivable………………………………………………………….. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)...
Unearned franchise revenue (P120,000 + P383,300.16) 503,300.1
………… 6

2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is
minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be:
Cash……….. 120,000.0
0
Notes receivable……………. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue…………………….. 503,300.1
6

3. If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of
services still to be performed by the franchisor in future periods, and collectibility of the note is reasonably assured, the entry should be:
Cash……….. 120,000.0
0
Notes receivable……………. 480,000.0
0
Unearned interest income (or Discount on notes 96,699.84
receivable)
Franchise revenue…………………….. 120,000.0
0
Unearned franchise revenue 383,300.1
6
4. If the initial down payment is not refundable and no future services are required by the
franchisor, but collection of the note is so uncertain that recognition of the note as an
asset is unwarranted, the entry should be:

Cash……….. 120,000.
00
Franchise revenue…………………….. 120,000.0
0

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.

5. If the initial down payment is refundable or substantial services are yet to be performed, but collection of the note is so uncertain that
recognition of the note as an asset is unwarranted, the entry should be:
Cash……….. 120,000
Unearned franchise revenue…………………….. 120,000

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.

Problem X
1. If the down payment is refundable, and no services have been rendered at the time the
arrangement is made, and collection on the note is reasonably certain, the entry should
be:

Cash……….. 120,000.
00
Notes receivable……………. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Unearned franchise revenue…………………….. 262,645.5
0

2. Initial services are determined to be substantially performed, the refund period has
expired and the collection of the note is reasonably assured, the full accrual method
would be used. Assume that substantial performance of the initial services costs
P52,529.1 the entry should be:

Cash……….. 120,000.
00
Notes receivable……………. 180,000.
00
Unearned interest income (or Discount on notes receivable) 37,354.50
Franchise revenue…………………….. 262,645.5
0

Cost of franchise revenue 52,529.1

0
Cash, etc…………… 52,529.10

Few months after, the collectibility of the note becomes doubtful or no reasonable
assurance, the installment sales method could be used as a general rule. In addition to
the entries above, following entries would be required:

a. To set-up cost of franchise:

No entry required, already set-up previously.
 b. To defer gross profit on franchise:
Franchise revenue 262,645.
50
Cost of franchise revenue 52,529.10
Deferred gross profit on franchise 210,116.4
0

c. Adjustments to recognize gross profit on franchise:

Deferred gross profit on franchise 96,000.0
0
Realized gross profit on franchise 96,000.00

Franchise revenue……….. 262,645.5

Less: Cost of franchise revenue 52,529.1
Gross profit……….. 210,116.4
Gross profit rate (210,116.4/262,645.5) 80%

Collections as to principal……. P120,000.

00
Multiplied by: Gross profit rate……. 80
%
Realized gross profit on franchise….. P
96,000.00
Problem XI
If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and
the permits on February 1, 20x5, and operations commence at that time, the following
journal entries would be appropriate:

July 1, 20x3:
Cash……….. 120,000
Notes receivable……………. 480,000
Unearned franchise revenue…………………….. 600,000

Deferral of revenue recognition is required when “substantial performance" of franchisor

services has not been completed. It would call for deferral of revenue recognition until
evidence of service performance was available. The best evidence, of course, would be
the commencement of operations of the franchise outlet and at this point in time,
revenue is recognized.

During 20x3:
Deferred cost of franchise revenue…. 360,000
Cash…………..……….. 360,000

December 31, 20x3:

Interest receivable (P480,000 x 14% x 6/12)………….. 33,600
Cash…………..……….. 33,600

February 1, 20x4:
Unearned franchise revenue…………………….. 600,000
Franchise revenue…………………….. 600,000

Cost of franchise revenue…………………….. 360,000

Deferred cost of franchise revenue…………………….. 360,000

Problem XII
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash………….. 1,500,000 1,500,000
Notes receivable……. 4,500,000 4,500,000
Unearned franchise revenue……. 6,000,000 6,000,000
Receipt of initial franchise fee.

Conditions to be met: Cash Notes Cash Notes

Services No No No No
Period of refund Yes Yes Yes Yes
Reasonably No
assured reasonable
Collectibility assurance
1/1/20x4 Balance 1,500,000 4,500,000 1,500,000 4,500,000
Status Liability Liability Liability Liability

December 31, 20x4

Cash………….. 1,575,000 1,575,000
Notes receivable……. 1,125,000 1,125,500
Interest income (P3,750,000 x 10%) 450,000 450,000
Annual collection.
Deferred cost of franchise 1,800,000 1,800,000
Cash………………… 1,800,000 1,800,000
To defer cost of franchise since substantial
services had not been performed.

Operating expenses 120,000 120,000

Cash………………… 120,000 120,000
To record expenses.

Adjustments:
Cost of franchise 1,800,000
Deferred cost of franchise 1,800,000
To recognize cost of franchise.

Unearned franchise revenue……. 6,000,000

Franchise revenue 6,000,000
To recognize franchise revenue based on
the
following analysis:

Conditions to be met: Cash Notes

Services Yes Yes

Period of refund Yes Yes

Reasonably
Collectibility assured

1/1/20x4 Balance………………….. 1,500,000 4,500,000

12/31/20x4: Collection as to 1,125,0 (1,125,000
principal 00 )

12/31/20x4 Balance 2,625,000 2,625,000

Status Revenue Revenue

Adjustments (Installment sales

method)
 a. To set-up cost of franchise:
No entry*

b. To set-up deferred gross profit

Unearned franchise revenue 6,000,000
Deferred cost of franchise
revenue 1,800,000
Deferred gross profit 4,200,000
*There are different options on this matter, an entry may be made to set-up cost of franchise and
eventually it will be closed to set-up deferred gross profit. Regardless of the option, the objective is to
set-up deferred gross profit. Refer to Illustration 9-6 for alternative treatment to set-up cost of franchise.
Conditions to be met: Cash Notes
Services Yes Yes
Period of refund Yes Yes
No
reasonabe
Collectibility assurance
1/1/20x4 Balance………………….. 1,500,000 4,500,000
1,125,00 (1,125,000
12/31/20x4: Collection as to principal 0 )
12/31/20x4 Balance 2,625,000 2,625,000
Revenue –
Status I/S Liability
Method

c. To recognize realized gross profit on

franchise:
Deferred gross profit 1,837,500
Realized gross profit on franchise 1,837,500
Collections – principal x gross profit rate
P2,625,000 x (6,000 – 1,800)/6,000 = P1,837,500

2.
No reasonable
Reasonably Assured assurance
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)* P6,000,000 P 0
Less: Cost of franchise (accrual 1,800,00
method)* 0 0
Gross profit on regular franchise
(accrual)* P4,200,000 P 0
Add: Gross profit on franchise
(installment -0
sales method) - *1,837,500
Gross profit on franchise P4,200,000 P1,837,500
Less: Operating expenses 120,000 120,000
P4,080,000 P1,717,500
Add: Interest income…………….. 450,000 450,000
Net income……………. P4,530,000 P2,167,500

Problem XIII
1.
No reasonable
Reasonably Assured assurance
January 1, 20x4
Cash………….. 1,440,000 1,440,000
Notes receivable……. 3,840,000 3,840,000
Unearned interest income* 796,896 796,896
 Unearned franchise revenue……. 4,483,104 4,483,104
Receipt of initial franchise fee.

Conditions to be met: Cash Notes (PV) Cash Notes (PV)

Services** No No No No
Period of refund – until date of
Opening No No No No
Reasonably No
assured reasonable
Collectibility assurance
3,043,104* 3,043,104*
1/1/20x4 Balance 1,440,000 ** 1,440,000 **
Status Liability Liability Liability Liability
*Unearned interest income or discount on notes receivable: P3,840,000 – P3,043,104 = P796,896.
* *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred
and subsequent direct cost of franchise should also be deferred.
***P960,000 x 3.1699 = P2,535,920

February 2, 20x4:
144,931.2 144,931.2
Deferred cost of franchise 0 0
Cash………………… 144,931.20 144,931.20
To defer cost of franchise since substantial
services had not been performed.

June 13, 20x4:

General expenses 60,000 60,000
Cash………………… 60,000 60,000
To record expenses.

August 8, 20x4:
Deferred cost of franchise 360,000 360,000
Cash………………… 360,000 360,000
To defer cost of franchise since substantial
services had not been performed.

November 2, 20x4:
Deferred cost of franchise 840,000 840,000
Cash………………… 840,000 840,000
To defer cost of franchise since substantial
services had not been performed.

November 2, 20x4:
Substantial completion of services.

December 31, 20x4:

Cash………….. 960,000 960,000
Notes receivable………………… 960,000 960,000
Annual collections.

Adjustments:
304,310.
Unearned interest income 304,310.40 40
304,310.4
Interest income 304,310.40 0
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.

Cost of franchise 1,344,931.

 20
1,344,931.2
Deferred cost of franchise 0
To recognize cost of franchise.

Unearned franchise revenue……. 4,438,1040

Franchise revenue 4,438,1040
To recognize franchise revenue based on
the
following analysis:

Conditions to be met: Cash Notes (PV)

Services** Yes Yes

Period of refund – outlet already
opened. Yes Yes
Reasonably
Collectibility assured
4,438,104
1/1/20x4 Balance 1,440,000

12/31/20x4:
Collection……………..... .
P960,000
Less: Interest collection… ( 655,689.60
304,310.40 )
Collection – 655,689.6
Principal…….P655,689.60 0

2,095,689. 2,387,414.4
60 0

Status Revenue Revenue

Adjustments (Installment sales

method)
a. To set-up cost of franchise:
1,344,931.
Cost of franchise revenue….. 20
Deferred cost of franchise 1,344,931.
revenue 20

b. To set-up deferred gross profit:

Unearned franchise revenue 3,483,104
1,344,931.
Cost of franchise revenue 20
2,138,172.
Deferred gross profit 80
*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will
be closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit.
Refer to Illustration 9-5 for alternative treatment to set-up cost of franchise.

Conditions to be met: Cash Notes (PV)

Services** Yes Yes
Period of refund – outlet already
opened. Yes Yes
No
reasonable
Collectibility assurance
1/1/20x4 Balance 1,440,000 304,104
 12/31/20x4:

Collection……………..... . P960,000
Less: Interest collection… 304,310.40 655,689.6 ( 655,689.60
Collection – Principal…….P655,689.60 0 )
2,095,689.6 2,387,414.4
0
Status Revenue – Liability
I/S Method

c. To recognize realized gross profit on

franchise:
Deferred gross profit 1,466,983.20
1,466,983.
Realized gross profit on franchise 20
Collections – principal x gross profit rate
P2,095,689.60 x (4,483,104 – 1,344,931.20)/4,483,104 = P1,466,983.20
2.
No reasonable
Reasonably Assured assurance
Income Statement, 12/31/20x4:
P
Franchise revenue (accrual method)* 4,471,1040 P 0
Less: Cost of franchise (accrual 1,344,931.2
method)* 0 0
Gross profit on regular franchise
(accrual)* P3,138,172.8 P 0
Add: Gross profit on franchise
(installment *1,466,983.2
sales method) -0- 0
P1,466,983.2
Gross profit on franchise P3,138,172.8 0
Less: Operating expenses 60,000 60,000
P1,406,983.2
P3,078,172.8 0
304,310.4
Add: Interest income…………….. 304,310.40 0
P3,382,483.2 P1,771,293.
Net income……………. 0 60

*Note: This item represents regular franchise sales-type transaction. If the collectibility of
the fee (note receivable) is reasonably assured, the permissible method to be applied should
be the accrual method. It should be observed that in the event, there is cost of franchise
and the installment sales method is used, the concept of revenue recognition does literally
apply to franchise revenue but to the recognition of realized gross profit on franchise thru
collections as to principal multiplied by gross profit rate.

Alternatively, computation of interest and principal collections are as follows:

Interest (10%
Date Collection of Principal Unpaid
Unpaid Balance
Balance)
1/03/20x4 4,483,104
1/03/20x4 1,440,000 -0- 1,440,000 3,043,104
12/31/20x4 960,000 304,310.40 655,689.60 2,387,414.40
Total 2,400,000 304,310.40 2,095,689.60

Problem XIV
1. The fee is earned for providing continuing services:
Cash or Accounts receivable………… 108,000
Franchise revenue – continuing franchise fee 108,000

2. If P10,000 of the fee is for national advertising:

Cash or Accounts receivable………… 108,000
Franchise revenue – continuing franchise fee 96,000
Unearned franchise revenue – continuing franchise fee…… 12,000

The franchisor recognizes the unearned franchise fees as revenue when it performs the
advertising services and also records the costs as expenses, the entries should be:

Advertising expenses………… xxx

Cash, etc……………….. xxx

Unearned franchise revenue – continuing franchise fee…… 12,000

Franchise revenue – continuing franchise fee 12,000

Problem XV
Cash or Accounts receivable… 117,600
Franchise revenue – supplies sales…………….. 117,600

Cost of franchise – supplies sales……… 90,000

Supplies inventory………. 90,000

Problem XVI
Cash……………. 21,600
Notes receivable (P108,000 – P21,600) 86,400
Unearned interest income (P86,400 – P69,978) 16,422
Franchise revenue (P21,600 + 69,978 – P4,800*) 86,778
Unearned franchise revenue – equipment sale* 4,800
All the criteria to recognize initial franchise fee as revenue was met, except that an amount
of P4,800 equivalent to indicated profit (P24,000, selling price less P19,200 option price) will
be deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows:
Cash or Accounts receivable… 19,200
Unearned franchise revenue – equipment sale 4,800
Franchise revenue – equipment sale…………….. 24,000
Cost of franchise - equipment sale………. 19,200
Equipment inventory………. 19,200

Problem XVII
April 1, 20x4:
Cash……………. 288,000
Notes receivable………… 192,000
Franchise revenue (P21,600 + P86,400 – P4,800*) 480,000

December 31, 20x4:

Franchise revenue – initial franchise fee 480,000
Interest income (P192,000 x 8% x 9/12) 11,520
Cash (P153,600 – P11,520)…………. 142,080
Notes receivable…………… 192,000
Gain or revenue from repossessed franchise…………… 134,400

Problem XVIII
 Cash 72,000
Notes receivable………… 360,000
Deferred franchise purchase option liability……. 432,000

Deferred cost of franchise revenue/Investment in Franchisee xxx

Cash, etc……… xxx

Deferred franchise purchase option liability………………………. 432,000

Deferred cost of franchise revenue/Investment in Franchisee xxx
Gain on option to exercise to purchase the franchise outlet……… 432,000

Multiple Choice Problems

1. d - 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
(November 1, 20x7), therefore, the P40,000 is unearned franchise revenue
while training (as service) and equipment (sales of equipment) are separately
classified but not as an unearned franchise revenue (in contrast to PAS 18)

2. a -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
(August 1, 20x8), therefore, the P11,500 is unearned service revenue (note:
not as a unearned franchise revenue in contrast to PAS 18)

3. c
Cash = P560,000 + P48,000 = P608,000
Franchise Fee Revenue = P560,000
Unearned Franchise Fees = P48,000 ×20% = P9,600
Revenue from Continuing Franchise Fees = P48,000 – P9,600 = P38,400.

4. b - P200,000 + P545,872 – P24,000 = P721,872.

5. c – P1,200

Commission = 25% x Sales price

P400 = 25% x Sales price
Sales price = P400 ÷ 25% = P1,600

Number of units sold = Selling price = __P1,600__ = 8 tapes

Price per tape P200 per tape

Sales ……………………………………………………………….. P1,600

Less Commission of consignee………………………………... 400
Amount remitted by Beta View Store………………………...P1,200

6. a – P 370

Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(25) (8) (15)
 Consignor’s charges:
Cost P2,500 P800 P1,500
Freight-out 75 30 45
Consignee’s charge - Commission __400__ __400__ _______
Total P2,975 1,230 _P1,545_
Sales price _1,600_
Consignment profit _P370_

7. a – P1,545 (refer to No. 6 for computation)

8. c - (15 x P850)  (P12,750  .06)  P300  P390 = P11,295.

9. c - P11,295  (15  P350) = P6,045.

10. b
Sales (P2,250 / 15%) P15,000
Divided by: Selling price per unit P 1,000
Number of units sold 15 units

11. c
Sales P15,000
Less Charges:
Commission P 2,250
Advertising 1,500
Delivery expense ___750 __4,500
Due to Consignor P10,500
Less: Advances
Value of note – sight draft: (100 beds x P600 per bed) x P36,000
60%
Multiplied by: Proportional number of beds sold 15/100 __5,400
Amount remitted P 5,100

12. d – P1,500
Sales P15,000
Less Charges:
Consignor’s charge:
Cost of beds (P600 per bed x 15 beds) 9,000
Consignee’s charges:
Commission P2,250
Advertising 1,500
Delivery expense ___750 __4,500
Consignment net income P1,500

13. a – no items were sold in November;

Sales (unknown) P x
Less Charges:
Commission 15% x
Remittance P 27,200

x – 15%x = P27,200
85%x = P27,200
x = P32,000
14. c – P16,800
Sales (unknown) x
Less Charges:
Advertising P500
Delivery and installation 100
charges
Commission (unknown) 20%x _______
Remittance P 12,840

x – (P500 + P100 + 20%x) = P 12,840

x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800

15. b- P6,080
Cost (P150 per unit x 40 units) P6,000
Freight on shipment (P200 x 40/100) 80
Cost of inventory on consignment P6,080

16. c - 6
Sales (unknown) x
Less Charges:
Commission (unknown) 20%x
Advertising P1,000
Delivery and installation 600
Cartage on consigned goods 500
Remittance P21,900

x – (20%x + P1,000 + P600 + P500) = P21,900

x – 20%x = P21,900 + P2,100
80%x = P24,000
x = P30,000

Number of units sold = _P30,000_ =6

P5,000 per set

17. b – P2,300
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(10) (6) (3)
Consignor’s charges:
Cost P30,000 P18,000 P9,000
Freight-out 2,500 1,750 750
Consignee’s charges:
Commission (20% x P30,000) 6,000 6,000
Advertising 1,000 1,000
Delivery and installation 600 600
Cartage __500__ __350__ __150__
Total P40,600 27,700 _P9,900_
Sales price _30,000_
Profit on Consignment __P2,300__
18. d – None of the above (P9,900) – refer to No. 17 for computation.
19. d - P17,625
Sales – (Sales x 20%) – P600 – P390 – P210 = P12,900
.8 Sales = P14,100
Sales = P17,625.

20. a (P270 x 50) + [(P600 ÷ 80) x 50] = P13,875.

21. a
Gross collection (P15,000 x 70% x 80%) P
8,400
Less: Cash discount taken by customer (P8,400 x 2%) __168
Net collection P 8,232
Less Charges:
Expenses P 800
Commission (P8,400 x 15%) _1,260 __2,060
Due to Consignor P 6,172
Less: Advances _6,000
Amount remitted P 172
22. b
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(100%) (70%) (30%)
Consignor’s charges:
Cost P10,000 P 7,000 P 3,000
Freight 120 84 36
Consignee’s charges:
Expenses 800 800
Commission (15% x P10,500) 1,575 1,575
Cash discount (P10,500 x 80% x 168 168
2%)
Total P12,663 P 9,627 _P9,900_
Sales price (70% x P15,000) _10,500_
Profit on Consignment P 873

23. b – refer to No. 22 for computation

24. c
Collection made pertaining to:
May sale
Down payment (3 x P50) P 150
Monthly payment thereafter (3 x P10) 30 P 180
June sale
Down payment (1 x P50) ___50
Total P 230
Less: Commission (P230 x 20%) ___46
Amount remitted P 184

25. d – P140
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(5) (4) (1
 Consignor’s charges:
Cost P 775 P 620 P 155
Freight 50 40 10
Consignee’s charges:
Commission 200 200 ____
Total P1,025 P 860 P165
Sales price (4 units x P250/unit) _ 1,000
Profit on Consignment P 140

26. b – refer to No. 25 for computation

27. b
Collection made:
Cash sale (P1,500 x 2) P 3,000
Credit sale (P1,800 x 25%) ___450
Total P3,450
Less: Charges
Freight P 320
Commission [(P3,000 + P1,800) x 15%] __720 __1,040
Amount remitted P 2,410

28. a
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(5) (3) (2)
Consignor’s charges:
Cost P4,000 P 2,400 P 1,600
Freight 200 120 80
Consignee’s charges:
Freight 320 192 128
Commission 720 720 ______
Total P5,240 P 3,432 P1,808
Sales price 4,800
Profit on Consignment P 1,368

29. b – P1,808 – refer to No. 28 for computation

30. d – 244,600
Sales on credit (14,000 per unit x 12 units) + (13,000 x 10) P298,000
Less: Sales allowance granted P 2,000
Bad debts 7,000
Commission [2% x (P298,000 – P2,000)] _44,400 __53,400
Amount still due from BB, Inc P
244,600

31. d – P67,280
Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(30) (22) (8)
Consignor’s charges:
Cost P240,000 P176,000 P64,000
Freight-out 1,800 1,320 480
Consignee’s charges:
Sales allowance 2,000 2,000
 Bad debts 7,000 7,000
Commission
[15% x (P298,000 – P2,000)] 44,400 44,400
Total P295,200 P230,720 _P64,480_
Sales price [P14,000 per unit x 12
units) 298,000
+ (P13,000 per unit x 10 units)]
Consignment profit P 67,280

32. d – P64,480; refer to No. 31 for computation

33. b – 395
Sales (unknown) x
Less Charges:
Commission (unknown)
(
__x__ P10 )
P100
Delivery expense __P45__ ________
Remittance P35,505
x- [( _x__ ) P10 + P45 ] = P35,505
100

x – _P10x_ = P35,550
P100
P100x – P10x = P3,555,000
P90x = P3,555,000
x = P39,500
Number of ball pens sold = _P39,500_ = P395
P100 per unit

34. b
Consignmen
Regular Sales t Sales Total
Sales P120,000 P30,000 P150,000
Cost of sales 84,000 19,500* 103,500
Gross profit P 36,000 P10,500 P 46,500
Operating expenses:
Commission (P30,000 x 5%) P 1,500 P 1,500
Freight-in (P260 x 1,950 1,950
P19,500*/P26,000)
Others
Regular (P15,150 x 12,120
P19,500/P26,000)
Consignment
(P15,150 x P30,000/P150,000) _______ 3,030 3,030
Total P 12,120 P 4,725 _P16,845_
Net profit P 23,880 P 5,775 P29,655
*P26,000 – P6,500 = P19,500

35. d – P5,775 (refer to No. 34 for computation)

36. a – (P18,000 + P900) = P18,900

Appendix – IAS (PAS) 18

1. a – following conditions should be observed to recognize revenue:
Services – none
Period of Refund – expired
Collectibility of the note – reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

2. d – following conditions should be observed to recognize revenue:

Services Performed – yes
Period of Refund – not expired / still refundable
Collectibility of the note – reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

3. a - following conditions should be observed to recognize revenue:

Services Performed – none
Period of Refund – expired
Collectibility of the note – very uncertain or extremely uncertain.

There was failure on one condition; therefore, no revenue should be recognized. Since,
the collectibility of the note is extremely uncertain recognition of the note as an asset in
unwarranted (or should not be recorded).

4. d – the problem already indicated that P300,000 is earned, therefore the remaining
balance of P400,000 (P700,000 – P300,000 is considered as unearned revenue.

5. a
Cash 6,000
Notes receivable 30,000
Unearned franchise fee 36,000

6. b
Unearned franchise fee 36,000
Franchise fee revenue 36,000

7. a
Cash 6,000
Notes receivable 30,000
Franchise fee revenue 36,000

8. d – the franchise fee revenue should be zero, since no substantial performance of

services had been performed (and the down payment is still refundable).
9. b
In this problem, since there is doubtful of collection, it is safely assumed to used
installment method. Therefore, the realized gross profit would be:
Collections in 20x4……………………………………………………………..P 200,000
x: Gross profit rate [100% - (P150,000/P500,000)]…………………………. 70%
Realized gross profit in 20x4…………………………………………………. P 140,000
Revenue Analysis:
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
Collectibility No Reas.
Assured
200,000 300,000
 Status Rev – I/S Method Liability
10. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee:
Cash Notes Receivable
Services Yes Yes
Period of Refund Yes Yes
Collectibility Reasonably Assured
P20,000 P80,000
Status Revenue Revenue

Substantial performance of services has been rendered because commencement of

operations by the franchisee shall be presumed to be the earliest point of which
substantial performance has occurred, unless it can be demonstrated that substantial
performance of all obligations, including services rendered voluntarily, has occurred
before that time.

Period of refunding the initial franchise fee and collectibility of the notes is not anymore
a problem (they depend on the profitability of its first year of operations) because the
result of operations in the first year is profitable.
Therefore, the initial franchise fee of P100,000 (P20,000 + P P80,000) is considered as
revenue, and a continuing franchise fee of P5,000 (1% x P500,000) should be also be
recognized as revenue – continuing fanchise.

Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus
P5,000 continuing).

11. a
Initial franchisee revenue (since all services had been performed
and assumed that period of refunding already expired)………………………….. P100,000
Add: Continuing franchise revenue (5% x P800,000)……………………………………
40,000
Total Revenue from franchise………………………………………………………………. P 140,000

12. d
There is already substantial performance of services rendered since, the franchise
outlet started operations and it is assumed that period of refund has expired.

The continuing franchise fee is recognized also as revenue since it is earned at the time
it was received.

The net income would be:

Franchise Revenue:
Initial Franchise Fee:
Down payment…………………………………………… P 30,000
PV of installment (P10,000 x 1.7355)……………………. 17,355
P47,355
Continuing Franchise Fee (5% x P500,000) 25,000
Total Franchise Revenue………………………………………………………………… P72,355
Add: Interest Income (10% x P17,355)…………………………………………………
1,735
Total Revenue/Net Income……………………………………………………………… P74,090

13. a
 All conditions that initial franchise fee be recognized as revenue had been met as
follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
200,000 300,000
Status Revenue Revenue

The Net Income then would be as follows:

Franchise Revenue………………………………………………………………..P 500,000
Less: Cost of Franchise…………………………………………………………… 150,000
Net Income…………………………………………………………………………P 350,000

14. d
In this problem, full accrual method is used to recognized the initial franchise fee of
P100,000 analyze as follows:

Revenue Analysis for IFF

Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
20,000 80,000
Status Revenue Revenue
Note: Period of refunding the initial franchise fee was presumed to have been expired
since the business operates profitably in its first year of operation.
Continuing Franchise Fee: Considered revenue the moment continuing services had
been rendered amounted to P5,000 (1% x P500,000).
Initial Franchise Fee…………………………………………………………P 100,000
Continuing franchise fee…………………………………………………. 5,000
Total…………………………………………………………………………… P 105,000
Less: Indirect cost of franchise…………………………………………… 15,000
Net income……………………………………………………………………P 90,000
16. b
Franchisee frequently purchases all of the equipment, products, and supplies from the
franchisor. The franchisor would account for these sales as if, it would be a product sales.
Sometimes, however, the franchise agreement grants the franchisee the right to make bargain
purchases of equipment or supplies after the initial franchise fee is paid. If the bargain price
is lower that the normal selling price of the same product or it does not provide the franchisor
the reasonable profit, then, a portion of the initial franchise fee should be deferred. The
deferred portion would be accounted for as adjustment of the selling price when the franchisee
subsequently purchases the equipment or supplies. Therefore, the amount of revenue would
be P90,234 computed as follows:
Cash Notes Receivable
Services Yes Yes
Period of Refund Yes Yes
Collectibility Reasonably Assured
P25,000 P68,234
Status Revenue Revenue except P3,000
reasonable profit on sale
 of equipment
The revenue from franchise would be:
Cash……………………………………………………………………………………………… P 25,000
PV of Note…………………………………………………………………………..P68,234
Less: Reasonable profit on sale of
Equipment P15,000 – P12,000)………………………………………….… 3,000 65,234
P 90,234
Incidentally, the entries would be:
Upon receipt of IFF:
Cash………………………………………………………………………… 25,000
Notes Receivable………………………………………………………… 90,000
Unearned Interest Income (P90,000 – P68,234)…………. 21,766
Franchise Revenue……………………………………………. 90,234
Unearned Franchise Revenue………………………………. 3,000

If equipment was sold:

Cash or Accounts Receivable………………………………………… 12,000
Unearned Franchise Revenue………………………………………… 3,000
Franchise Revenue – Equipment…………………………… 15,000

Cost of Sales – equipment……………………………………………… 12,000

Equipment Inventory………………………………………….. 12,000

17. d
Total fee P800,000
Discount P 640,000
(507,200) (132,800)
Bargain purchase (10,000)
Advertising (P1,000 × 60) (60,000)
P 597,200

Cash....................................................................................... 160,000
Notes Receivable.................................................................... 640,000
Discount on Notes Receivable /Unearned Int. Income 132,800
Revenue from Franchise Fees ..................................... 597,200
Unearned Franchise Fees ............................................ 70,000

Or alternatively,
Cash....................................................................................... 160,000
Notes Receivable (at present value or net). . .…………. 507,200
Revenue from Franchise Fees ..................................... 597,200
Unearned Franchise Fees ............................................ 70,000

18. c – refer to No. 17

19. c – refer to No. 17

20. b
Cash Notes Receivable
Services No No
Period of Refund No No
Collectibility Reasonably Assured
P25,000 PV - P39,623
FV – P50,000
UII/Disct. P10,377
Status Liability Liability
21. d

22. d
Franchisee A:
The circumstances imply that full accrual method could be used.
Franchise Revenue…………………………………………..……………..P 17,890*
Less: Franchise Cost……………………………………………………….. 7,000
Gross Profit……………………………………………………………………P 10,890
Add: Interest Income (P10,890 x 4%)……………………………………. 436
Net Income…………………………………………………………………..P 11,326
*Initial deposit…………………………………………….P 7,000
Add: PV of four payments (P3,000 x 3.6299)……… 10,890
P17,890

23. b – refer to No. 22

24. a – strictly speaking, the franchise revenue means only arising from the franchise itself
meaning coming from the franchise fee. In certain cases, the franchise revenue may
construe to be all income arising from franchise transaction including interest.
Franchisee B:
Because of the doubtful of collection and only partial completion, the deposit method
(unearned franchise revenue) should be used. No revenue or income would be
recognized in 20x4 from the franchise fee. However, because the first payment of
P3,000 was made, interest income of P436 would be recognized.

25. b – P436 the interest income (P10,890 x 4%). Refer to No. 24 for discussion.

36. a – strictly speaking, the franchise revenue means only arising from the franchise itself
meaning coming from the franchise fee. In certain cases, the term “franchise revenue”
may construe to be all income arising from franchise transaction including interest.
Franchisee C:
Because of the doubtful collection but substantial completion, either the installment
sales or cost recovery method could be used. If the installment sales method is
used, gross profit of P4,218* would be recognized in 20x4 plus interest income of
P436.
* Franchise Revenue………………………………………………………………P 17,890
Less: Franchise Cost……………………………………………………………… 10,000
Gross Profit………………………………………………………………………....P 7,890
Gross profit percentage: P7,890 / P17,890………………………………….. 44.10%
Collections in 2007:
Initial Deposit…………………………………………………………… P 7,000
Collections – Principal:
First Installment…………………………………….. P 3,000
Less: Interest……………………………………….. 436 2,564
Collections – Principal………………………………………………… P 9,564
Multiplied by: Gross profit percentage……………………………. 44.10%
Recognized Gross Profit – 2001……………………………………… P 4,218
Add: Interest Income………………………………………………….. 436
Net Income……………………………………………………………….P 4,654
If the cost recovery method is used, no revenue or income would be recognized,
because the P10,000 collections are exactly offset by the P10,000 costs.

27. c – refer to No. 26 for computation

THEORIES
1. c 6. a 11 a 16. d
.
2. d 7. b 12 c
.
3. a 8. b 13 a
.
4. b 9. d 14 b
.
5. b 10 d 15 d
. .

Appendix – IAS (PAS) 18

1 True 6. True
.
2 False 7. True
.
3 False 8. True
.
4 False 9. a
.
5 True
.